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: