bursting of the credit bubble and weak protection and enforcement of property rights in the aftermath of the 1994-95 crisis<sup>59</sup> . Although this was likely true as late as the early part of the period under consideration in this paper, the rationale no longer carries as much weight due to the introduction of significant legal and regulatory reforms. These have supported the resolution of the non-performing loan (NPL) overhang stemming from the 1995 crisis and enhanced loan origination standards and credit risk management practices. In combination with good macroeconomic policies, foreign bank entry<sup>60</sup> and a favorable external environment, they have contributed to the modernization of the financial system and have significantly strengthened prudential oversight and the financial infrastructure (e.g. capital markets framework, corporate insolvency procedures, secured lending instruments, and credit bureau). While the overall impact and valueadded of these reforms will become more evident over time, additional reforms are required to improve enforcement procedures, public registries of commerce and the judicial system.

The accessibility and affordability of financing have generally improved – albeit unequally across markets segments – over the period under consideration. In particular, access to domestic capital markets has increased considerably since 2001, but mostly for large highly-rated firms. Anecdotal evidence suggests that credit accessibility and affordability have also improved for bank commercial lending, although it is difficult to substantiate due to lack of reliable data. However, in spite of various government programs to support micro and SME loans, the share of bank lending to these firms does not seem to have increased considerably. By contrast, there has been a strong increase (from a low level) in household financing access and terms in recent years, although the persistent divergence in rates for similar credit products across lenders potentially suggests market segmentation and/or insufficient transparency and disclosure. The accessibility of financing also varies widely across different Mexican states, which can be partly attributed to differences in the business environment and the level of enforcement of creditor rights.

The prospects for continued private sector financing growth remain very positive. Barring unfavorable macroeconomic and external developments, the capacity of the domestic financial system to expand private sector financing (particularly to households) and thereby contribute further to economic growth is strong. It is underpinned by wellcapitalized and profitable banks, sizeable institutional investor assets (which are growing at around 1 percent of GDP per annum), relatively low levels of private sector exposure in terms of GDP or financial system assets<sup>61</sup> , and a much improved legal and regulatory framework. International experience suggests, however, that it will take time for the beneficial effects of the aforementioned improvements to be reflected in higher financial intermediation<sup>62</sup> .

> 59 See, for example, Haber S. (2005). Other authors go even further and attribute the credit crunch to insufficient structural reforms and an incorrect policy response to handling NPLs – see, for example, Gonzales-Anaya J.A. (April 2003) and Tornell A. (January 2004).

> 60 See, for example, Haber S. and Musacchio A. (November 2005) and Schulz H. (forthcoming).

> 61 Private sector financing in the form of loans, bonds, and equity represents below 40 percent and 20 percent of commercial bank and institutional investor assets, respectively.

> 62 See, for example, the cases of Chile and Korea in BBVA Bancomer (2005Q3).

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