A Reappraisal of State-Owned Banks

Economia 01/2007; 7(2). DOI: 10.1353/eco.2007.0015
Source: RePEc


We revisit the public banks debate, survey the theoretical arguments and test the robustness (and expand) the existing empirical evidence. While we find some support for the view that public banks do not allocate credit optimally, we also report indicative evidence that they exert a positive influence on private bank efficiency, and may contribute to reduce credit procyclicality. Ultimately, we find that the recent criticism to public banks has generally been based on inconclusive cross-country evidence. More specific bank-level research is still needed to substantiate a case for or against public banks in developing economies.

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Available from: Ugo Panizza,
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    • "Public banks are viewed as a mechanism to maximize social welfare (Banerjee, 1997). Banks controlled by State must adopt a more active strategy when the frequency of market failures is high in certain sectors; they may focus on those linked with external funding, information asymmetries, intangible assets and substantial spillovers (Levy Yayeti et al., 2007).State owned banks are less profitable because they maximize broader social objectives. "
    02/2015; 10(3). DOI:10.5539/ijbm.v10n3p189
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    • "The causality may also move in the opposite direction, as a growing economy also generates a higher demand for credit. In the absence of functioning financial markets, credit and economic growth may even be causally 1 Theoretical arguments supporting a positive finance-growth nexus draw on a broad theoretical literature interpreting government-owned banks as a convenient tool to spur economic development and alleviate poverty (Banerjee, 2003; Burgess and Pande, 2003) by channeling household savings into productive investments (Gerschenkron, 1962; Stiglitz, 1994; Hausman and Rodrik, 2003; Adrianova et al., 2008), lower interest rate risks and greater financial stability (Demirguç-Kunt and Detragiache, 1998; Reinhart and Kaminsky, 1999), an absence of excessive risk taking by bank managers (Akerlof and Romer, 1993; Demirguç-Kunt and Detragiache, 1998), and an increased effectiveness of monetary policy instruments, such as expansive measures to push the economy out of a recession (Micco and Panizza, 2006; Yeyati et al., 2007). administered by the same government, and characterized by shared historical roots, language, and cultural values. "
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    ABSTRACT: Whether state-owned banks are growth promoting or not is highly contested given the assumed disincentives associated with public ownership. Bank efficiency, however, does not only depend on distinct ownership regimes, but also on the bank’s main functions, lending strategies and market competition. This paper provides a first comparative analysis of different types of publicly owned banks operating in China between the year 1997 and 2008. Using principal component analysis and Granger-causality tests, this study shows that China’s state-owned commercial banks, and rural credit cooperatives did not promote GDP-growth during the observation period. State-owned commercial banks even had a negative growth effect on the manufacturing sector. By contrast, state policy banks and joint stock commercial bank did in fact promote domestic growth. China’s experience suggests a more nuanced account of state-banking looking beyond the role of ownership, to incorporate functional and institutional differences.
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    ABSTRACT: Although both domestic and foreign private banks have gained ground in MENA in recent years, state banks continue to play an important role in many countries. Using a MENA bank-level panel dataset for the period 2001-08, the paper contributes to the empirical literature by documenting recent ownership trends and assessing the role of ownership and bank performance in MENA while accounting for key bank characteristics such as size and balance sheet composition. The paper analyzes headline performance indicators as well as their key drivers and finds that state banks exhibit significantly weaker performance, despite their larger size. This result is mainly driven by a larger holding of government securities, higher costs due to larger staffing numbers, and larger loan loss provisions reflecting weaker asset quality. The results reflect both operational inefficiencies and policy mandates. The paper also provides a detailed performance analysis of foreign and listed banks. Foreign banks are fairly new in MENA, yet perform on par with domestic banks despite their smaller size and higher investment costs. Listed banks exhibit superior performance driven by higher interest margins even in the face of higher costs associated with listing. Taken together, the results do not reject the development role for state banks, but do show that their intervention comes at a cost. As such, there is scope to reduce the share of state banks in some countries and to clarify the mandates, improve the governance, and strengthen the operational efficiency of most state banks in MENA.
    Review of Middle East Economics and Finance 04/2011; DOI:10.1515/rmeef-2012-0025
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