should the government be in the banking business? the role of state-owned and development banks
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Should the Government be in the Banking Business? The Role of State-Owned and Development Banks. Eduardo Levy-Yeyati (UTDT) Alejandro Micco (IDB) Ugo Panizza (IDB). Public Banks in Latin America: Myths and Realities Inter-American Development Bank Research Department. Outline. Theory - PowerPoint PPT PresentationTRANSCRIPT
Should the Government be in the Banking Business?
The Role of State-Owned and Development Banks
Eduardo Levy-Yeyati (UTDT) Alejandro Micco (IDB)
Ugo Panizza (IDB)
Public Banks in Latin America: Myths and RealitiesInter-American Development BankResearch Department
Outline
• Theory
• What do we know about the performance of public banks?– The Micro Evidence– The Macro Evidence
• Conclusions
Outline
• Theory
• What do we know about the performance of public banks?– The Micro Evidence– The Macro Evidence
• Conclusions
PSB are prevalent in
• Developing countries– Low financial development– Poor institutions
Two Views
• Development and social views– State-owned banks can address market failures
and achieve development goals
• Political view– Politicians create and maintain state-owned
banks as a political tool aimed at maximizing their personal objectives
Two Views
The scarcity of capital in Russia was such that no banking system could conceivably succeed in attracting funds... Supply of capital for the needs of industrialization required the compulsory machinery of the government.
Gerschenkron (1962) pp. 19-22
…whatever its original objectives, state ownership tends to stunt financial sector development, thereby contributing to slower growth.
The World Bank (2001) p. 123
Two Key Questions
• Should the state intervene in the banking sector?
• How should the state intervene?– Regulation, Subsidy, Contracting– Direct ownership
Should the state intervene in the banking sector?
1. Maintaining the safety and soundness of the banking system
2. Mitigating market failures that lead to under-provision of banking services, during given periods of time, or to certain economic sectors
3. Giving access to banking services to residents of isolated areas
How should the state intervene?
1. Safety and Soundness
• Banking regulation and supervision together with deposit insurance can reduce bank fragility– This is indeed the avenue followed by most industrial
countries
• However, deposit insurance and regulation do not work well in some developing countries
• Direct state ownership has the potential to increase the trust of the public in the banking system and lead to deeper financial markets (Adrianova et al., 2002)
2&3 Too little lending to isolated areas, certain economic sectors and periods of time
• If the characteristics of the goods or services to be produced can be fully specified, incentives are the same
• With non-contractible qualities, increasing the incentives along a measurable dimension reduces incentives along non-measurable dimensions (Holmstrom and Milgrom 1991)
• If cost reduction leads to a deterioration of the non-contractible quality, private provision may lead to lower quality (Hart et al. 1997)
• Providing banking services to isolated areas
Too little lending to isolated areas, certain economic sectors and periods of time
• Providing banking services to isolated areas
Too little lending to isolated areas, certain economic sectors and periods of time
• Providing banking services to isolated areas
• Lending for the development of certain economic sectors– Trickier because development impact cannot
be monitored in the short-run
Too little lending to isolated areas, certain economic sectors and periods of time
• Providing banking services to isolated areas
• Lending for the development of certain economic sectors– Trickier because development impact cannot
be monitored in the short-run
Too little lending to isolated areas, certain economic sectors and periods of time
• Providing banking services to isolated areas
• Lending for the development of certain economic sectors– Trickier because development impact cannot
be monitored in the short-run
• Countercyclical lending– Private banks may not internalize the
expansionary effects of increasing lending during recessions
Too little lending to isolated areas, certain economic sectors and periods of time
• Providing banking services to isolated areas
• Lending for the development of certain economic sectors– Trickier because development impact cannot
be monitored in the short-run
• Countercyclical lending– Private banks may not internalize the
expansionary effects of increasing lending during recessions
Too little lending to isolated areas, certain economic sectors and periods of time
Outline
• Theory
• What do we know about the performance of public banks?– The Micro Evidence– The Macro Evidence
• Conclusions
What do we know about the performance of public banks?
• The Micro evidence– In developing countries, public banks are
characterized by low profitability and low interest margins
• Profitability is particularly low in Latin America
– In both industrial and developing countries, public banks have high overhead costs
Outline
• Theory
• What do we know about the performance of public banks?– The Micro Evidence– The Macro Evidence
• Conclusions
The development impact of state-owned banks
• OLS regressions yield a negative and statistically significant impact of state ownership of banks on subsequent financial development and GDP growth (La Porta et al., 2002)
• One puzzling result is that state-owned banks seem to have a strong negative impact on growth in countries with low levels of financial development– Countries with high financial development know how to deal with the
distortions brought about by PSB
– The model is misspecified:
• Omitted variables
• The big issue is Endogeneity
Allocation of Credit
• PSB reduce the effect of financial development on growth
• PSB do no allocate more credit to small firms
• Their lending is less procyclical than that of private banks
Outline
• Theory
• What do we know about the performance of public banks?– The Micro Evidence– The Macro Evidence
• Conclusions
Summing up
• On the one hand– The evidence that state ownership of banks
tends to stunt financial sector development, thereby contributing to slower growth is less strong than previously thought
• On the other hand– PSB have fiscal costs (especially in developing
countries) – PSB play no beneficial role in terms of growth
and allocative efficiency
Summing up• From the academic point of view
– The research agenda is still open. We need to address causality in order to make stronger statements
• From the policy point of view– Assume PSB are bad but popular with politicians – Should policy advisors spend their limited political
capital on this issue?– A clear definition of the objective function and
measurement of the subsidy would allow conducting true cost-benefit analyses and address the Sisyphus Syndrome (De La Torre, 2002)
Should the Government be in the Banking Business?
The Role of State-Owned and Development Banks
Eduardo Levy-Yeyati (UTDT) Alejandro Micco (IDB)
Ugo Panizza (IDB)
Public Banks in Latin America: Myths and RealitiesInter-American Development BankResearch Department