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state-owned banks

The AAF Virtual Debates: Charles Calomiris on State-Owned Banks

Submitted by Charles Calomiris on Wed, 2011-02-02 13:32

Editor's Note: The following post was submitted by Charles Calomiris, the Henry Kaufman Professor of Financial Institutions at Columbia University, as part of the AAF Virtual Debates. In this opening statement, Professor Calomiris gives a negative answer to the question: "Can state-owned banks play an important role in promoting financial stability and access?"

It is quite correct to say, as Asli’s introduction to this debate noted, that academic work strongly supports “a growing consensus that the track record of state-owned banks has been quite poor” and has been associated with “inefficiencies, increased risk of crises, and less inclusion and greater concentration of credit,” and support for “cronies.” Not only do studies of the performance of state-controlled banks confirm these findings over and over again, the presence of state-controlled banks is so clearly understood to be a poisonous influence on financial systems that measures of the presence of state banking are often used as control variables when evaluating the performance of private banks. These studies indicate powerfully the negative effects of state-controlled banks on the banking systems of the countries in which they operate. The winding down of state-controlled banks was rightly celebrated in many countries in the 1990s as creating new potential for economic growth and political reform.

Why are state banks such a disaster? There are three main reasons:

The AAF Virtual Debates: Franklin Allen on State-Owned Banks

Submitted by Franklin Allen on Wed, 2011-02-02 13:10

Editor's Note: The following post was submitted by Franklin Allen, the Nippon Life Professor of Finance and Economics at the Wharton School, as part of the AAF Virtual Debates. In this opening statement, Professor Allen gives an affirmative answer to the question: "Can state-owned banks play an important role in promoting financial stability and access?"

The prevailing view in the academic literature holds that private banks are much superior to state-owned or public banks. In many emerging-market countries public banks have been corrupt and inefficient. In contrast private banks have performed much better in terms of efficiently allocating resources over the long run.

However, the crisis has underlined the fact that public banks enjoy several advantages over private banks, and their merits may need to be reevaluated. At the height of the crisis in the fall of 2009, the three largest banks by market capitalization in the world were all state-owned:  the Industrial and Commercial Bank of China, China Construction Bank, and Bank of China. Although they are publicly listed, the Chinese government owns the majority of their shares. Their structure provides an interesting governance model. Perhaps more importantly, most large privately owned banks in Europe and the U.S. received government funds and guarantees during the crisis. Without this government intervention, many would have failed. The governments bore the downside risk but without full control, generating a significant moral hazard problem in these banks’ future operations.

The AAF Virtual Debates: Join Charles Calomiris and Franklin Allen in a Debate on State-Owned Banks

Submitted by Asli Demirgüç-Kunt on Mon, 2011-01-31 20:21

The Question: "Can state-owned banks play an important role in promoting financial stability and access?"

Before the crisis, there was a growing consensus that the track record of state-owned banks was quite poor. Despite a few success stories, government provision of financial services was generally considered to be problematic. The overwhelming majority of empirical evidence—from cross-country studies to detailed analysis of statistics on bank credit in individual countries—all pointed to a stark set of conclusions: lending by state banks is associated with inefficiencies, increased risk of crises, and less inclusion and greater concentration of credit. Further, the evidence suggested that state-owned banks tend to lend to cronies, especially around the time of elections, confirming numerous anecdotes most of us have heard about. When it comes to savings and payments services, the record was a bit better but still pretty mixed, with poor service quality.

Then came the crisis and things started to change. Policymakers everywhere struggled to offset the reluctance of private institutions to lend more during the crisis, some relying on their Central Banks, others through their state-owned banks to expand credit. While memories of the large sums spent in cleaning up state bank portfolios have not quite faded, there certainly is a new-found appreciation for the potential countercyclical role state banks can play in crisis recovery. State interventions of all sorts—including state-ownership of banking—are now being viewed in a much more positive light. So much so, that in a recent special report even the Economist suggested that the optimal mix for a banking system may include a significant share of public banks.

Bank Lending to SMEs: How Much Does Type of Bank Ownership Matter?

Submitted by Asli Demirgüç-Kunt on Wed, 2011-01-26 18:38

Small and medium-size enterprises (SMEs) account for close to 60 percent of global manufacturing employment. So it is no surprise that financing for SMEs has been a subject of great interest to both policymakers and researchers. More important, a number of studies using firm-level survey data have shown that SMEs perceive access to finance and the cost of credit to be greater obstacles than large firms do—and that these factors really do constrain the growth of SMEs.

In recent years a debate has emerged about the nature of bank financing for SMEs: Are small domestic private banks more likely to finance SMEs because they are better suited to engage in “relationship lending,” which requires continual, personalized, direct contact with SMEs in the local community in which they operate? Or can large foreign banks with centralized organizational structures be as effective in lending to SMEs through arm’s-length approaches (such as asset-based lending, factoring, leasing, fixed-asset lending, and credit scoring)? And how well do state-owned banks—for which expanding access to finance is often among their top objectives—serve SMEs?