Disciplining the International Banking Community

Parts of the international banking community were displeased with the U.S. banks' domination of the agreement with Mexico. In particular, Japanese and European banks were angry that previous loans to Mexico served as the baseline in computing the value of the 7 percent solution. Japanese banks argued that they had never made any direct loans to Mexico, but had simply "acquired promissory notes from U.S. banks" (Kraft 1984, 52). Swiss banks claimed that Mexico's baseline numbers included the sale of bonds (which were specifically excluded from the rescue agreement).

Regional and local banks in the United States were equally contentious. They were not as heavily exposed to Mexico as were the major commercial banks. The small banks resented being forced, in effect, to bail out the large banks (Kraft 1984, 52). Regional and local banks were particularly unhappy that the large money center banks made the policy decisions and agreements that all banks had to abide by: "We never participated in jumbo loans to the Mexican government. So we didn't feel we should pay for the mistakes of the money center banks. Just because they decided to put up an additional 7 per cent was no reason for us to do it. 'Who decided what and why?' was the question I kept raising," complained one regional banker (Kraft 1984, 53). But the large U.S. banks had state help to enforce those decisions. When one Florida bank balked at the 7 percent solution, the Federal Reserve got involved. The head of the recalcitrant bank explained:

We made trouble for the big banks on the theory that they might let us out of all the loans just to get us out of their hair. At one point we even made noises about a law suit against some of the Mexican banks. That turned out to be unwise. The threats came to the attention of the Federal

Reserve Board. The Fed is our main regulator, and in fact we need approval for a merger. The bank examiners came around and started asking questions. That was enough for us. We dropped the suit. (Kraft 1984, 53)

The large U.S. banks achieved unity in the international banking community despite the resistance of Japanese and European banks and small regional U.S. banks, which claimed that the so-called 7 percent solution placed an inequitable burden on them to support what was essentially a rescue plan for the large U.S. banks. The mechanism that compelled opponents to comply with the large U.S. banks' solution was the structure of lending consortia. More than 1,600 banks had jointly provided loans to Mexico (U.S. Congress, House 1982, 52). A refusal by the major U.S. banks to renegotiate those loans would have meant a significant loss to all and bankruptcy for some. The sheer size of the large U.S. banks put them in a stronger position than the small banks to flirt with the possibility of a Mexican default without suffering bankruptcy. Their size all but guaranteed the large banks a federal bailout, since the U.S. government has always feared the economic and political repercussions of bankruptcies among major banks.

Although each bank's exposure to Mexico would in theory determine its ability to absorb Mexico's bankruptcy, past congressional action indicated that the size of the bank would be the more important factor. Furthermore, participating in lending consortia is the only way small banks can get access to the lucrative corporate and national lending business. They had to comply with the 7 percent solution or forfeit participation in future lending consortia of all sorts.

The forces of discipline in the international banking community were formidable. In the United States the major commercial banks applied pressure on the regional banks, and the regionals pressured the local banks. Mexico's advisory board (composed predominately of bank representatives) invoked whatever forms of pressure it considered appropriate: "Sometimes we [the board] brought pressure from state or Federal regulators; sometimes from figures in the local community; sometimes from other bankers" (Kraft 1984, 53). Apparently the major banks had little difficulty getting state institutions to apply pressure on their behalf.

Internationally, the U.S. Treasury unofficially pressured the Japanese, French, and Swiss governments to "make their banks see rea-

son on the basic finacing formula." British and French bankers visited the Middle East to convince Kuwaiti and Saudi Arabian bankers to cooperate. De Larosière himself promoted the agreement to Italian bankers (Kraft 1984, 53). Finally, the comptroller of the currency in the United States sent a letter to Mexico's advisory board reaffirming Volcker's earlier promise that the Federal Reserve would ease regulations for all banks participating in the loan agreement, as stipulated by the IMF. After much arm-twisting, the major banks successfully disciplined the rest of the banking community into a hegemonic front. The rescue operation was well on its way. What the banks now needed was state support in developing a mechanism to bail out their investments. That effort quickly found a voice in congressional hearings on increased quotas for U.S. participation in the IMF and on new facilities at the Export-Import Bank for Mexico (and Brazil, which had similar problems).