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

Asli Demirgüç-Kunt's picture

The Proposition: "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.

What do you think? I've asked Charles Calomiris of Columbia University and Franklin Allen of the Wharton School to kick off the debate. Please join us and let us know which side you are on. They'll be posting opening statements later this week on the proposition: "Can state-owned banks play an important role in promoting financial stability and access?" The comments section will be open, and we'll also be featuring a poll that will allow our readers to weigh in on the issue. 

Pro

Franklin Allen

Nippon Life Professor of Finance and Economics at the Wharton School

Read more about Professor Allen.

Con

Charles Calomiris

Henry Kaufman Professor of Financial Institutions at Columbia University

Read more about Professor Calomiris.

Comments

Submitted by C Vicente on
Thanks for motivating this important debate. The reason we are seeing the comeback of state banks is because private banks demonstrated during the crisis that they are also prone to the same incentives problems that have been used to argue against state banks. Therefore, it's difficult to use Professor Calamoris' reasoning to convince client countries not to create/restructure state-banks. I think we should have a balanced debate that brings examples of few successful public/development banks (e.g. DBSA of South Africa), explores what is unique about them, and discusses to what extent their experiences can be replicated.

Submitted by Eva Gutierrez on
This is a very stimulating discussion. One thing it maybe worth having in mind is that previous empirical evidence suggesting that development banks acutally impede financial sector development (such as silanes-porta) has been disputed by several recent papers using more comprehensive data sets and more suitable econometric techniques.

Submitted by V. . Singh on
Yes, despite some issues regarding full autonomy and interference, State Owned Banks have played a major role in promoting financial stability and access to banking facilties in India. State owned banks have much better records of providing financial services at relatively reasonable rates and promoting inclusive growth of banking services. The Govt had stopped giving financial support to Development Fiancing Institutions(DFIs)in India following the economic reforms initiated in late ninties.This led to conversion of larger ones into commercilal banks and the remaining regional DFIs either became defunct or shrinked in size and operations. Following this unfortunate developments growth of new entreprenuers/ enterprises has considerably declined, creating entry barriers and concentration of economi ownership. We have now more billionnaires and larger unemployment on the other hand. The story will not be much different in other developing economies. The World Banks should help and advise these economies to revive DFIs and promote Small Business Finance Companies under puplic private partnership to promote self employment and dispersal of economic ownership.

Submitted by Mustafa Disli on
An interesting empirical question is to verify whether privatizations have resulted in different outreach numbers. Normally, after privatizations commercial missions should outweigh social objectives and this may lead to less banking in rural non profitable regions. A potential further step to analyze is whether privatizations in the past have led to an increase in income inequality in the analyzed countries.

Submitted by Selcuk Caner an... on
The response of state banks to mitigate the effects of the financial crisis in various countries deserves a closer analysis. While inefficiencies and misallocation of resources by state-owned banks in various countries is well-documented, it is also a well-known fact that we are glad that some countries managed to limit the negative effects of the global financial crisis because of the existence of state-owned banks. A comparison of the costs of bank bail-out programs in private banking systems versus mixed banking systems would provide better evidence about the usefulness of state-owned banks. In support of the existence of state-owned banks, in the Russian Federation the cooperation between the Central Bank of Russian and the two largest state-owned banks, Sberbank and Vneshtorgbank enabled the continued functioning of the banking system. This is a first in the Russian Federation which has experienced bank runs resulting in significant welfare losses. The two state-owned banks assisted the Central Bank in providing liquidity, credit and consolidating troubled banks while at the same time enabling the financial system to continue operating. In an earlier study we conducted on Russian banks, we found the state-owned banks in the Russian Federation to be more efficient than the private banks. This result refutes the sweeping arguments raised by Calomiris on the efficiency of private banks as a foregone conclusion.

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