Publications
Publications
- 2004
- HBS Working Paper Series
Contract Rights and Risk Aversion: Foreign Banks and the Mexican Economy, 1997-2004
By: Stephen Haber and Aldo Musacchio
Abstract
In 1997 Mexico allowed foreign banks unrestricted entry to the market. What impact did foreign mergers and acquisitions have on Mexico's banks? We find that all banks in Mexico have become increasingly risk averse, and that foreign banks are even more so. Foreign banks grant less credit, screen loans more intensively, and charge lower interest rate spreads. The cause is Mexico's weak contract rights environment. One would normally associate risk aversion with lower profits. We find, however, that foreign banks are more profitable than domestically owned banks because their market power allows them to charge higher service fees than domestic banks.
Keywords
Risk and Uncertainty; Contracts; Market Entry and Exit; Globalization; Microeconomics; Banks and Banking; Banking Industry; Mexico
Citation
Haber, Stephen, and Aldo Musacchio. "Contract Rights and Risk Aversion: Foreign Banks and the Mexican Economy, 1997-2004." Harvard Business School Working Paper, No. 05-025, October 2004. (Revised February 2008, previously titled "Foreign Banks and the Mexican Economy, 1997-2004.")