Syndicate content

Add new comment

A glimpse into state financial institution ownership in Europe and Central Asia

Aurora Ferrari's picture

State-owned financial institutions (SOFIs) are back in vogue. Although the theoretical and empirical debate on state ownership in finance may continue to sway back and forth, the 2007–08 global financial crisis renewed policy makers’ interest in SOFIs as a policy instrument.

This interest is particularly visible in countries in Europe and Central Asia (ECA), where policy makers have turned to SOFIs for countercyclical interventions, as quantitative easing appears to have little impact on economic growth; the cost of bailing out privately-owned financial institutions has mounted; and many countries face significant fiscal constraints. From the publicly-owned British Business Bank (established to assist smaller businesses), to the Investment Plan for Europe (the “Juncker Plan,” which relies on “National Promotional Banks” to intermediate resources from the European Fund for Strategic Investments), SOFIs have been used to fill perceived gaps or complement the public policy toolkit.

Data on SOFIs are sparse and inadequate to assess and evaluate some important aspects of their operations, such as mandates, instruments, performance, governance, and monitoring. A recent World Bank survey fills this gap and analyzes commercial and development SOFIs in post-global financial crisis ECA and its subregions (East ECA, West ECA, and Benchmark Europe).1 Based on the replies of 41 institutions distributed across 21 countries, some interesting patterns emerge.

Many SOFIs in the sample are relatively new. Despite the liberalization policies that followed the transition from centrally planned economies to market economies, over 60% of the SOFIs in the sample were created after 1990, and three of the four SOFIs created after the global financial crisis were established in Benchmark Europe. The focus has been on development SOFIs, as the number of these established institutions more than doubled after 1990, and they have sustained post-2007.

Mandates vary across types of SOFIs. Development SOFIs tend to have narrower mandates and appear significantly more focused on infrastructure. All commercial SOFIs established before 1990 had a specific policy mandate, but none created after 1990 did. Small and medium-size enterprise financing dominates among sector-specific goals. In West ECA, perhaps aiming to benefit from the European Union’s geographic proximity, SOFIs are more focused on supporting exports. Over half of the region’s SOFIs have a mandate that includes financial sustainability, and these SOFIs tend to have lower profitability and significantly higher operating expenses. Just one in four SOFIs has a countercyclical policy, and this is predominantly among development SOFIs.

Retail and wholesale loans are the most common product. Equity financing is offered less frequently. About 70% of development SOFIs combine direct and on-lending; of the remaining 30%, only 10% absorb risk in other ways. About 60% of development SOFIs offer products that deviate from market conditions (compared with just 20% among commercial SOFIs). Compared with commercial SOFIs, development SOFIs are also almost twice as likely to risk-share with private banks. SOFIs concentrate heavily on manufacturing and energy (the former more prevalent in West ECA and the latter in Benchmark Europe). Agriculture is consistently targeted, but stands very low compared with other sectors. There appears to be a significantly higher incidence of lending to state-owned enterprises in East ECA. Technical assistance is offered by just a quarter of all SOFIs. Only 40% of commercial SOFIs offer leasing or factoring, and just a third of development SOFIs offer equity financing or venture capital. Very few SOFIs offer matching grants.

After the global financial crisis, SOFIs expanded more rapidly than the overall banking sector, independently of whether their mandate included a countercyclical role. Compared with development SOFIs, commercial SOFIs expanded their loan portfolios faster, but appear to have turned to investment instruments post-2011, possibly government bonds. Development SOFIs’ median asset growth has fallen significantly post-2011, although the median loan growth rate remains unchanged, perhaps reflecting a continued drive emanating from narrower policy mandates.

SOFIs were not immune to the global financial crisis, which had a mixed impact on profitability and balance sheets. Commercial SOFIs were considerably more profitable than development SOFIs in 2007, but experienced a more dramatic drop from 2007 to 2011, although the trend somewhat stabilized thereafter. Nonperforming loans increased significantly for all SOFIs, driven primarily by direct lending operations, which may also explain the earlier spike among commercial SOFIs. Interestingly, the rate of nonperforming loans associated with state-owned enterprises is low overall, and almost nonexistent in Benchmark Europe. This fact is worth a deeper look, as it may indicate forbearance or delaying dealing with the issue. Since the global financial crisis, several SOFIs have been recapitalized, independent of type or location. Median capital adequacy ratios are high among SOFIs (and above those in the overall banking sector).

The measurement of results varies across SOFIs. Commercial SOFIs mostly measure success by loan volume, and development SOFIs by the number of clients served and products offered. Nevertheless, more than one in five development SOFIs do not define performance indicators. Roughly half of the SOFIs undertake impact evaluations, but do not have in-house capacity to do so. Notably, receiving funding from a multilateral financial institution increases the probability of undertaking an impact evaluation by 65%.

------------------
1 Benchmark Europe includes France, Germany, Latvia, the Netherlands, Spain, and the United Kingdom; West ECA includes Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Macedonia, Poland, Romania, Slovenia, and Turkey; and East ECA includes the Kyrgyz Republic, Belarus, the Russian Federation, and Ukraine. In this paper, in practice, commercial SOFIs are institutions that may or may not have a policy mandate, and perform mainly commercial banking activities, including the collection of retail deposits; development SOFIs are institutions that have a policy mandate and do not collect retail deposits, and specifically support the internationalization efforts of firms, international trade, and investment (the Exim function).