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

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.