In Mexico, monetary policy has proved effective in achieving price stability, but this has not been reflected in economic growth and job creation. This article studies the bank credit channel, a topic that has stirred up much interest in economic literature, specifically analyzing the credit market in Mexico. It hypothesizes that the existence of a banking oligopoly is a key factor that limits the creation of credit in the Mexican economy, which negatively impacts economic activity.

INTRODUCTION

In the realm of economic policy, the balance of payments crisis that Mexico suffered in 1994-1995 led to a change in the exchange rate regime; the government was forced to move from a fixed exchange rate with floating bands to a flexible exchange rate, in which, as in the majority of countries with these types of regimes, “dirty” floats, where the government and central bank do intervene, have prevailed. As a result of this shift, monetary policy soon became the cornerstone of macroeconomic stability.¹ Later on, the 2008-2009 financial crisis revealed that to achieve the goal of price stability, Banco de México (Banxico) used not only the bank lending rate² as a monetary policy tool, but also the exchange rate and open market operations.

The current inflation-targeting regime that Banxico has implemented since the beginning of the twenty-first century is part of the new monetary paradigm,³ developed by the authors of the new neoclassical school. The inflation-targeting model was established in 2001; in 2002, the criteria regarding the range of the price variation rate were defined. The idea is that the inflation expectations of economic agents coincide with the target set by Banxico. The criteria with respect to the range established were set in order to achieve inflation levels similar to those of the other member countries of the North American Free Trade Agreement (NAFTA), the United States and Canada.

Monetary policy has proved effective in controlling price growth and, in relative terms, Mexico has managed to converge towards the inflation rates of the United States and Canada. According to the central bank, we must first achieve price stability before hoping that the economy can return to an economic growth path, an idea inspired by authors such as Milton Friedman, the principal proponent of the school of economic thought known as monetarism.⁴ Unfortunately, in Mexico, price stability has not always been accompanied by economic growth and job creation. Nearly two decades have passed since 1995 and we are still in what monetarists would call the short-term phase; that is, we are bearing the social cost that has sunk the country into a situation of economic stagnation, albeit with price stability.

Why has monetary policy not had a more favorable impact on economic growth and job creation? Basically, this situation is due to the monetary policy transmission mechanism, which considers the relationships between monetary policy changes and their effects on output, employment and prices. “[The transmission mechanism of monetary policy] can be broken up into two elements – the impact of monetary policy changes on aggregate demand; and the effect of changes in aggregate demand on output, employment and prices” (Bain and Howells, 2003: 171).

An analysis of the transmission mechanism would naturally include various channels, but the orthodox macroeconomic literature normally focuses on four: the interest rate channel, the exchange rate channel, the price of other assets channel and the credit channel.⁵ Monetary policy affects both the domestic market and external sector, as we have already mentioned in another paper.⁶ The purpose of this article is to offer a simple explanation of the bank credit channel, for which we will base the discussion on Bernanke and Blinder (1988) and then analyze the credit market in Mexico. The hypothesis we propose is the existence of a banking oligopoly, reflected, for example, in the high degree of concentration in the collection of deposits, an important factor that limits the generation of credit in the Mexican economy, and produces negative effects, especially for the micro, small and medium-sized enterprises that most depend on bank credit.

The credit channel refers to how monetary policy affects bank loans and, in turn, bank loans on income through the credit that banking institutions grant to companies and families. According to Bernanke and Gertler (1995), there are various models that formalize the credit channel, but broadly speaking, they can be divided into two types: the bank lending channel and the balance sheet channel; the former shall be discussed in this work.

The balance sheet channel describes a situation in which companies need guarantees in order for banks to lend to them. The value of these guarantees changes throughout the economic cycle, which in turn affects the capacity of companies to acquire debt. Movements in the interest rate modify the value of the assets and liabilities of current and future debtors, affecting their wealth and solvency. A contractionary monetary policy can increase the amount a company spends on interest, reducing its net cash flows and worsening its financial situation. At the same time, increased interest rates are generally associated with a decrease in asset prices, reducing the value of the collateral that debtors can present. In this way, the financial position of companies is negatively affected and it is harder for them to obtain financing, which reduces investment.⁷

This paper consists of three sections. The first briefly reviews the ideas of some major authors who have emphasized the importance of bank credit in the economic system; we present the basic Bernanke and Blinder (1988) model to explain how the credit channel works. The second section analyzes the Mexican banking system and shows that it constitutes a market structure of imperfect competition. This section analyzes two variables: the degree of concentration of bank deposits and the differences between active and passive interest rates. Finally, we present some conclusions.

1. THE BANK CREDIT CHANNEL

1.1. The Historical Importance of Bank Credit

Loans are important in financial markets because many companies and families obtain financing through bank credit; banks are a source of financing for productive investment and the purchase of housing and durable consumer goods. As such, the generation or contraction of bank credit affects economic cycles; credit is procyclical, which means that during phases of economic expansion, credit normally increases, and during economic contraction, which can lead to an economic crisis or depression, bank credit is reduced because the risk rate increases. The importance of bank credit is corroborated by various authors and theoretical approaches.

I. Fisher (1867-1947) believed that fluctuations of the money in circulation and credit availability, in addition to causing inflation and deflation, explain the ups and downs of economic activity and employment. He became more and more convinced that better currency management would “soften cyclical fluctuations.”⁸ For example, in the downswing of the economic cycle, he wrote: “when prices are falling, expenses likewise lag behind and reduce profits, for exactly the same reason turned about. Consequently, during periods of falling prices, profits are reduced, bankruptcies are increased, concerns shut down entirely or in part, and men are thrown out of work” (Fisher, 1973: 498). From his perspective, one measure to substantially prevent unemployment was to maintain the purchasing power of the currency stable, that is, maintain stability in general price levels.

In his article entitled “A Statistical Relation Between Unemployment and Price Change,” published in 1926 and re-edited by the Journal of Political Economy in 1973, Fisher demonstrated that there is a causal relationship between inflation and employment or deflation and unemployment: that ups and downs in employment are the effects, in large part, of rising and falling prices, due in turn to the inflation and deflation generated by variations in money and credit.⁹

In 1928, Fisher published The Money Illusion, a groundbreaking work in understanding the origins and consequences of what he called the illusion of a stable currency in a gold standard system. The author demonstrated that the supposedly stable value of currencies was no more than a mere illusion, because when nations pegged their official currencies to a specific weight with respect to gold and guaranteed their convertibility, they would not be able to maintain purchasing power for commodities when price levels changed, and because trade tended to take place through the means of monetary exchange, transactions would not necessarily have a reference point for their values, which would generate imbalances in the trade balance. To understand this problem, Fisher proposed index numbers¹⁰ as a mechanism to measure the real value of currencies, and established some historical references, such as the case of Germany before and after the First World War.

Fisher insisted that currency instability was a basic social issue, because: “if we want to prevent our vast credit superstructure from periodically crumbling over our heads, we should view banking activities as something more than a private business: an important public service” (Nasar, 2014: 334).

R. G. Hawtrey (1879-1975) is the most well-known proponent of the monetary theory of the cycle. He believed that the elasticity of bank credit causes economic cycles. His proposal does not include the figure of the central bank, but rather the banking system in his model was made up of private-sector commercial banks, and the analysis was conducted under the monetary system of the gold standard.¹¹ In this context, the boom phase of an economic cycle begins when merchants start to notice that their inventories are falling to undesired levels; as such, they seek to increase inventories by placing new orders with producers. However, instead of financing them with increased savings, they decide to ask for credit from the banks, which means they acquire debt. Business people also pay their suppliers in bank credit when they issue a check, in such a way that sellers have increased stock but there is no need for current consumption to fall.

The increase in bank lending reduces the monetary interest rate, which allows businesses to increase the stock of their merchandise, which in turn increases effective demand, giving rise to the growth phase of the economic cycle, in which there is a higher demand for labor and capital to increase production, which in turn increases commercial activity and stimulates the demand for new bank credit, which is once again reflected in an increase in effective demand.

This phase is maintained as long as credit continues to expand. However, banks cannot grant credit in an unlimited fashion because this would generate scarcity in their reserves, which leads them to hold back on available credit. When the economic system experiences credit restrictions, effective demand starts to contract, with the consequent fall in production levels, employment and prices. Hawtrey asserts that if this credit restriction did not occur, the boom cycle of the phase could go on indefinitely, at the expense of an undefined increase in prices and the abandonment of the gold standard.

Based on the above, Hawtrey felt that it was most suitable to adopt policies that would contribute to stabilizing prices. We believe that the author’s work contains an implicit argument regarding the need to have a central bank when he wrote that responsible officials control credit and are willing to cooperate (Hawtrey, 1928). “The central bank should be in charge of controlling monetary issuance and the interest rate is the most important factor to stabilize the value of the currency, or equivalently, control price growth” (León, 2010: 111).

The credit cycle was of central concern to J.M. Keynes in the Treatise on Money (1930), a work that explicitly recognizes the influence of K. Wicksell in its discussion of concepts such as: savings, investment, the natural interest rate and the market interest rate. In General Theory (1984: 10), Keynes asserts that the ideas proposed in his 1930 book correspond to conventional classical economic theory, because they consider production levels. Keynes proposes that fluctuations in the product and employment are the result of insufficiencies in effective demand, basically provoked by unstable investment, whose movements are closely related to speculative markets. But as Levy (2011) wrote, in General Theory, Keynes omits the money demand for the purpose of financing but highlights the importance of the motive of speculation in the instability of the money demand, as responsible for variations in the interest rate and income. The motive of financing is reintroduced in later works (1937a, 1937b and 1939).

Based on the 1937 articles, Levy signals that for Keynes, the provision of financing comes from two sources: bank credit and the “new issue” market, which are indistinct. In the case of an entrepreneur who obtains a financial provision from a bank, the process begins with the decision to spend ( ex ante investment), which requires the liquidity that banks can grant, through a “revolving” fund (the Robertson proposal), of more or less constant amount, “one entrepreneur having his finance replenished for the purpose of a projected investment as another exhausts his on paying for his completed investment” (Keynes, 1937a: 246). That is, given an amount of liquidity, there can be a continuous process of financing if the debts acquired to finance production are settled. However, if the balance between ex ante and ex post investment is broken, greater liquidity must be injected into the “revolving” fund (a cash advance on a debt). Keynes assumed that banks can satisfy this demand by granting credit, independent of real resources, although he was aware that bankers can also raise interest rates, producing congestion in the banking market (Levy, 2011: 114-115).

The post-Keynesian school of thought is a heterodox perspective and consists of a heterogeneous group of economists;¹² B. Snowdon and H. Vane (2005: 452) ascertain that, according to Holt (1997), the majority of economists that we refer to as post-Keynesian are traditionally divided into two broad groups: i) the European school or the Cambridge school; this includes works associated with economists such as Geoff Harcourt, Richard Kahn, Nicholas Kaldor, Michael Kalecki, Joan Robinson and Piero Sraffa. This group has emphasized the behavior and operations of the real economy, while ignoring, or at least minimizing, the monetary and financial implications. ii) The American school; which includes authors such as Victoria Chick, Alfred Eichner, Jan Kregel, Hyman Minsky, Basil Moore, George Shackle, Sydney Weintraub and Paul Davidson.¹³ Some, but not all, members of this group have focused their attention on the impact of uncertainty and monetary and financial influences on the economy.

Post-Keynesian monetary theories, according to Pierre Piégay and Philippe Rochon (2006) can be classified into three types:1) post-Keynesian monetary theory,2) monetary circuits theory and3) the Schmitt circuit school. These theories link monetary creation to production, where commercial banking credit plays a crucial role in the economic system.

Generally speaking, post-Keynesian monetary theory states that in a monetary economy, there is an important relationship between money and economic activity, the monetary supply is endogenous, money is not neutral, neither in the short nor long term, and the short-term monetary interest rate constitutes a distributive variable, rather than representing the cost of money, as it does in neoclassical theory. Likewise, income generation does not necessarily imply an equivalent expense, due to the theory of the preference for liquidity and the existence of uncertainty in different markets.

In the framework of new Keynesian economics, authors such as Ben Bernanke and Mark Gertler (1995) asserted that the influence of monetary policy on the real economy goes beyond the traditional interest rate channel, which operates through aggregate demand and affects decisions on consumption and investment. They emphasize the credit channel, a mechanism that as we will see in the next section, amplifies and propagates the effects of the traditional monetary policy channel. The Bernanke (1983) article is complementary to the paper by M. Friedman and A. Schwartz (1963), who stressed the monetary impact of bank collapses in the 1930s;¹⁴ in this case, the author focuses on the non-monetary aspects of the financial sector associated with credit and their impact on production, considering the problems of debtors and the banking system. The author demonstrates that the financial disturbances of 1930-1933 made the credit allocation process less efficient, leading to higher costs and lower credit availability, which contributed to the fall in aggregate demand and can explain the duration and depth of the Great Depression.

According to authors such as Karl Brunner and Allan Meltzer (1993), intermediation and credit markets play a role in transmitting monetary and fiscal policy to asset and product markets. However, a good portion of macroeconomic models do not consider the credit market, a factor that would limit the scope of their conclusions. For example, the IS-LM model assumes that two assets exist: money and bonds, in such a way that the only interest rate that appears is the bond rate, and this constitutes the only monetary policy transmission channel. But this channel is not enough to explain the effects that monetary variations generate on real and nominal variables in a world where corporate and financial market transactions are imperfect.

There are many ways for companies to finance their investments: in the capital market, issuing bonds or shares, going directly to a bank to ask for credit¹⁵ or, finally, through external debt. One important aspect to keep in mind for analyzing the credit channel is that bank credit and the rest of debt instruments are not perfect substitutes; in addition, not all companies have access to the various forms of financing. Micro, small and medium-sized enterprises will normally be restricted to bank credit or informal credit in people’s savings banks. As such, the bank credit channel limits the financing these types of companies can obtain. By contrast, large companies do not face any issues in entering the capital market, because they have solvency, profitability and credit history.

The credit channel works in the following way: expansionary monetary policy increases bank deposits, and with that, the amounts available for bank loans rise, which generates an increase in investment, consumption of durable goods and the aggregate product. The chain of events is described below.

In the 1970s, the monetarism school asserted that monetary policy played a relevant role in economic activity, but the ways in which it affects the product in the short-term are less clear; this aspect is important because there are also studies that ascertain that aggregate demand is inelastic in response to interest rate variations. However, the idea proposed was that this demand is indeed very sensitive to changes in consumption and investment. One alternative was to analyze the positive effects of money on economic activity and the impacts that would persist over time.

De Gregorio (2007) published a study on different countries regarding the correlation between bank credit as a percentage of GDP and per-capita GDP. The study drew on data provided by the International Monetary Fund (IMF) during the time period 1990 to 2004, considering only countries with populations of more than one million people and whose annual per-capita income was over one thousand dollars. The study demonstrated that banks always increase credit in times of economic activity booms and reduce it in recessions, and it also found a positive correlation between the variables studied, with an average of 0.5 for all of the countries analyzed.

1.2 THE BERNANKE AND BLINDER MODEL

The IS-LM model postulates the role of monetary policy through the interest rate channel, but it "has no markets for credit or loans, so claims about the significance of credit or bank loan rationing cannot be examined within the (structural) IS-LM framework” (Brunner and Meltzer, 1995: 88).

Bernanke and Blinder (1988) developed a variation on the IS-LM model, including three assets: money, bonds and loans. The model supposes that economic agents do not use the money supply, and as such, the money demand is constituted only of deposits, banks maintain a reserve of an amount of those deposits, this amount is assumed constant, and it is also assumed that deposits do not pay interest; this is a model in which prices are fixed equal to unity, in such a way that real and nominal quantities are equal. Finally, it asserts that the money market is described by the LM function. "A central bank can set its intermediate targets in terms of both a monetary and credit aggregate. The validity of the choice depends on the relative stability of the demands for money and credit. If the disturbances that affect the money demand are empirically more significant than the disturbances that affect the credit demand, then a policy based on an intermediate target formulated in terms of a credit aggregate is more warranted than one formulated in terms of a monetary aggregate and vice versa" (Vega, 1992: 19).

It is assumed that both lenders and borrowers choose between bonds and loans based on the returns each of these generates. Let ρ be the interest rate on loans and i the interest rate on bonds. In this way, then loan demand is defined as follows:

(1)

Where y denotes income level, and as such, credit demand is a function of the bond interest rate, income level and the credit interest rate. Equation (1) indicates that higher income levels generate an increase in the loan demand, while an increase in the interest rate on loans acts as a disincentive to the credit demand. Finally, an increase in the bond interest rate produces an increase in the credit demand.

In addition, to understand the loan supply, we consider a simple version of a bank balance sheet.

Because the reserves are defined as the sum of the reserve requirements (D) and excess reserves (E), that is, , the accounting identity can be written as:

(2)

Equation (2) asserts that the sum of bonds, credit and excess reserves is equal to the quantity of net deposits. The model assumes that the composition of the proportions of assets will depend on their rates of return. The sum of these proportions is expressed as:

(3)

Each of these proportions is defined as a function of the interest rates.

(4)

Where β is a decreasing function of ρ and an increasing function of i; in which λ is an increasing function of ρ and a decreasing function of i. Finally, the model assumes, for simplicity, that only i influences the excess reserves demand, where ε is a decreasing function of the bond interest rate. As such, the credit supply is determined as follows:

(5)

In such a way that the credit market equilibrium can be expressed through the following equation:

(6)

We know, based on the above claims, that the total quantity of reserves is equal to the sum of the requirements plus the excess, and that the excess reserves, in turn, are expressed as . As such, the reserves can be defined as:

(7)

Where the deposit demand (D) is an increasing function of income and a decreasing function of the bond interest rate, that is, D=D(i,y). The expression is denoted as m(i).

In this way, the deposit demand can be expressed as follows:

(8)

The remaining market is the goods market, which relates interest rates with production and can be summarized in the following expression:

(9)

As such, the model consists of four markets: credit, bond, deposits and goods. The authors of this model use the reasoning described up this point to derive a curve that shows not only the goods market equilibrium, but also the equilibrium of the credit market. To do so, they consider the equilibria of the credit, deposit and goods market, equations (6), (8) and (9), respectively, and assume, by Walras' law, that the bond market is in equilibrium.

Substituting (8) into (6) and reducing for ρ, we obtain:

(10)

Substituting (10) into (9), we obtain the following expression:

(11)

Equation (11) is known as the commodities and credit (CC) curve, and is equivalent to the IS curve. However, under the claims made in the model, output levels depend not only on the bond interest rate but are now also a function of reserve levels, in such a way that all points on the CC curve represent combinations of the product and the bond interest rate that not only balance the goods market but also the credit market. As asserted at the beginning, the LM curve is not modified at all and is derived traditionally.

Figure 1 shows the interaction between the CC and LM curves when the central bank carries out monetary expansion through open market operations, which produces an increase in R and in turn a shift in the LM curve, from LM₀ to LM₁, as well as in the CC curve, from CC₀ to CC₁. In the traditional IS-LM model, an expansionary monetary policy would undoubtedly lead to a decrease in the bond interest rate to a level equal to i_IS, while the product would only increase up to y_IS. However, as shown in Figure 1, the effect of monetary expansion on the product is greater for the credit market, causing the product to grow to a level equal to y₁. It should be noted that in the CC-LM model, monetary expansion has uncertain effects on the interest rate, because the value of that expansion will depend on the magnitude of the shifts in the two curves and their respective slopes.¹⁶

The conclusion is therefore that an efficient credit market enhances the effects of monetary policy on economic growth.

2. THE BANKING SYSTEM IN MEXICO

This section introduces some indicators that offer an account of the degree of concentration in the Mexican banking system, especially looking at deposit collection and the granting of credit to the private sector. Likewise, they demonstrate that commercial banks have preferences in granting credit to certain sectors.

Based on data from the National Banking and Securities Commission (CNBV), we know that on average, in the 2001-2013 period, around 80% of commercial banks took in 87.43% of deposits.¹⁷ In 2001, Bancomer and Banamex alone accounted for 51.13% of deposits: 28.98% and 23.17%, respectively. By February 2014, 51.48% of deposits were in the hands of Bancomer (22.26%), Banamex (15.68%) and Banorte (13.54%).

With regard to the granting of credit, on average during the same time period, 18.13% of the credit was granted by 80% of banks, which means that only 20% of banks accounted for granting 81.7% of credit. In 2001, 55.43% of credit had been granted by three banks, with the following distribution: Banamex, 25.85%; Bancomer, 21.19% and Banorte, 8.38%.

One common way of gauging the degree of concentration is the Gini coefficient, which oscillates between zero and one; a value equal to zero indicates perfect competition and a value equal to one signals a monopoly. In Figure 2, we can observe how the index has evolved for the Mexican banking system. It shows the concentration of deposits and of credit granting. One important aspect to keep in mind is that according to the Commercial Bank Registry maintained by CNBV, in 2001, there were 20 banks, but by 2014, as mentioned earlier, there were 43 banks. Therefore we might expect that with more banks, the degree of concentration would fall, both for deposits and credit granting. However, the banking system continued to be extremely concentrated.

The average Gini coefficient for deposit concentration is 0.79, indicating concentration closer to a monopoly situation. The results were similar for the granting of credit, with an average for the period of 0.76%, also indicating a near-monopolistic situation.

If we accept the hypothesis that the existence of a non-competitive credit market dilutes the multiplicative effects of expansionary monetary policy on the product, we can then say that the direction of causality goes from credit market concentration to economic growth. In other words, the relationship between these two variables should be inversed; that is, a higher Gini index means lower growth. In effect, in 2001-2013, the correlation coefficient between the economic growth rate of Mexico and the concentration of credit granting was -0.28%, while–it was -0.40% for the relationship between economic growth and deposit concentration.¹⁸

In its "Report on the Conditions of Competition in Financial Markets" (2013: 5), Banco de México signals that "a competitive financial sector helps ensure that financing flows towards more productive products on better terms, that people make payments efficiently and securely and that their savings obtain the best returns.”¹⁹ However, based on a few indicators, we can deduce from this report that the banking system is a model of imperfect competition, which is why financing will not flow towards the most productive projects, payment systems will be inefficient and savings will not obtain the best returns.

In a competitive banking system, Bernanke (1983: 263) defines the cost of credit intermediation (CCI) as the cost of channeling funds from savers/lenders into the hands of good borrowers. CCI includes screening, monitoring and accounting costs, as well as the expected losses inflicted by bad borrowers. Banks presumably choose operating procedures that minimize CCI. However, in a banking system of imperfect competition, such as the system in Mexico, the cost of credit intermediation is rather high. We can approximate it as the difference between active interest rates (in this case we take, by way of example, the household credit interest rate) and passive interest rates (average cost of collection). The period we analyze is from January 2005 to May 2014. As shown in Figure 3, the gap between the active and passive rates is very high. According to Banco de México data, from 2005 to 2008, it was on average 9.66%, but rose to 10.76% from 2009 to 2014, an adjustment reflecting the higher perception of risk associated with the 2008-2009 global financial crisis.

Another issue is that financial inclusion in Mexico is severely lagging. The CNBV defines financial inclusion as: “the access to and use of financial services under appropriate regulatory systems that guarantee protection schemes for consumers and financial education to improve the financial capacities of all segments of the population.” This definition includes not only the chance to gain access (supply), but also the effective use of financial services by individuals (demand).

Peña, Hoyo and Tuesta (2014), BBVA Bancomer analysts, note that statistics reveal that savings levels and the number of people that have an account with some financial institution in Mexico are below the respective levels in Latin America and the Caribbean, not to mention the global average. In 2011, only 27.4% of the population above age 15 had opened an account with some financial institution (bank, credit union or cooperative), and only 7% had some type of savings with any institution. This data is just the tip of the iceberg of all the data the authors present to demonstrate that financial inclusion in Mexico is severely lagging. Their study draws on data from the 2012 National Financial Inclusion Survey (ENIF), conducted by the CNBV and the National Statistics and Geography Institute (INEGI). Other authors, such as Ampudia (2011), have produced evidence of the financial exclusion to which the population, especially the poor, in addition to micro, small and medium-sized enterprises, is subject, due to the lack of access to banks and credit restrictions.

The profit margins earned by oligopolistic banks present another challenge. Banxico data indicate that the cost of a fixed-term liability in national currency as of April 2014 was 3.14%, while the total average annual cost of mortgage credits as of March 2014 was 13.43%.

The destination of the credit granted is another sign of the preferences of the banking system; some of the control that banks have over the markets is reflected in their decision-making capacity and choice to grant credit only to certain industries. From 2001 to 2013, the quantity of commercial banking credit granted to the private sector in Mexico amounted to about 1.32 trillion pesos, of which only 2.26% was allocated to the agricultural sector (which has been severely penalized), while the services sector received 27.0% of total credit, as shown in Figure 4.

3. CONCLUSIONS

In the framework of economic theory, various authors have asserted that the generation of credit in an economy is a factor that influences economic growth. As such, this activity cannot be left exclusively to the private sector, which is why development banks must complement the function of commercial banks.

Although there are various factors that can explain slow growth, this paper has demonstrated that in Mexico, the financial intermediation process through bank credit has been limited due to factors related to supply, associated with the existence of a banking oligopoly, as well as demand, related to financial exclusion.

To achieve higher growth rates, various policies are necessary. For example, reducing the degree of informality in the economic system would generate lower risks in granting credit to micro, small and medium-sized enterprises, as would implementing support programs to help these types of companies enter the export market. In the opinion of the director of the group Trust Funds for Rural Development (FIRA), agricultural insurance must become more flexible. It is also time for more coverage options with flexible prices that can operate at any time to create more solid projects. Financial intermediaries must also be willing to run the risk of granting credit.²⁰ Consequently, in light of the ideas set forth in this paper, the backbone of any initiative that aims to increase participation in the loanable funds market must first curtail the power of the banking oligopoly.

Granting more credit at lower interest rates is a necessary step to implementing substantial structural reforms that will truly increase competition in the credit market and therefore contribute to social welfare. One alternative would be to bolster development banks to drive growth in economic sectors less preferred by commercial banks, such as small-scale farmers and primary sector producers, who face steep challenges in obtaining credit from the banking system, much less from international markets.

It is worthwhile to mention that the recent financial reforms in Mexico contain a chapter dedicated to development banking, in the recognition that “the strength of development banking would unleash credit for productive and strategic activities that would otherwise not receive this credit;"²¹ it also states that “the resources of the federal government are not enough to finance development for the entire country, which is why we must use these funds to induce the participation of the private sector in an efficient manner."²² However, Juan Castaingts believes that the financial reform largely left the banking oligopoly alone, failing to truly alter how it earns profits. The banking oligopoly continues to focus on charging for services rather than carrying out its task of receiving deposits and granting credit. Active interest rates, which are what creditors truly pay, continue to be much higher than those that savers receive and in addition, they are higher in Mexico than abroad, which principally affects small and medium-sized enterprises, which create the most jobs.²³

Despite the fact that the financial reform proposes strengthening development banks as a mechanism to promote strategic activities and sideline the oligopolistic power of commercial banking, it is still an incomplete reform. The ultimate objective of all economic policies should be to guide the economy towards a better social situation than the present. In that sense, this paper highlights the role of commercial banks in the monetary policy transmission mechanism and the capacity of these banks to mitigate or multiply the effects of the policy on real variables.

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