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state-owned banks

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

Charles Calomiris's picture

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

Franklin Allen's picture

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.

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

Asli Demirgüç-Kunt's picture

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?