Empirical Studies of Bank Privatization: Some Lessons * George Clarke, Robert Cull, and Mary Shirley * Clarke and Cull are senior economists in the Development Economics Research Group at the World Bank. Shirley is the president of the Ronald Coase Institute. We would like to thank Gerard Caprio and participants at the Bank Privatization Conference held at the World Bank in November 2003 for comments on earlier drafts. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive or the countries they represent.
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Empirical Studies of Bank Privatization: Some Lessons *
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Empirical Studies of Bank Privatization: Some Lessons*
George Clarke,
Robert Cull,
and Mary Shirley
* Clarke and Cull are senior economists in the Development Economics Research Group at the World Bank. Shirley is the president of the Ronald Coase Institute. We would like to thank Gerard Caprio and participants at the Bank Privatization Conference held at the World Bank in November 2003 for comments on earlier drafts. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank, its Executive or the countries they represent.
Three Themes
1. Motivation for this research.
2. Main findings.
3. Policy conclusions.
State banks more important in poorer countries
% of Assets Held by State-Controlled Banks, by income level 1999
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
LOW LOWERMIDDLE
UPPERMIDDLE
HIGH NON-OECD
OECD
Substantial Regional Variation
Share of Banking Assets Held by Govt. Banks, 1999
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
SouthAsia
Europe,Central
Asia
Africa LatinAmerica,Carribean
East Asia,Pacific
MiddleEast,NorthAfrica
OECD
Variation in Bank Privatization…
Change in Assets Held by Govt. Banks, 1999-2002
-16.0%
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
Africa Europe,Central
Asia
LatinAmerica,Carribean
East Asia,Pacific
OECD SouthAsia
MiddleEast,NorthAfrica
Variation in Privatization
Change in Assets Held by Govt. Banks, by Income Level, 1999-2002
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
Low Middle High
Theoretical promises:
Private banks might take bigger risks, creating more crises (Caprio & Honohan 2001)
Private banks might restrict access to credit for some firms because of: Imperfect information Incomplete contracts (Greenwald, Stiglitz 1986)
More generally, private bank ownership might result in highly concentrated markets, resulting in high interest rates and less credit (Caprio & Honohan 2001)
State banks reduce financial sector development and growth
State banks are associated with: Less financial development Slower growth Lower productivity
And effects are larger in countries with: lower income weaker protection of property rights
Barth, Caprio, Levine 2001;La Porta, Lopez-de-Silanes and Shleifer 2002.
State banks do not improve stability
Same risk of systemic banking crisis (Barth, Caprio,
Levine 2001)
Or perhaps even increased risk! (Beck, Demirguc-Kunt
and Levine 2003; Caprio and Martinez Peria 2002)
And instability (La Porta, Lopez-de-Silanes and Shleifer 2002)
Because of credit misallocation, state banks may be a bigger threat to stability than private banks
State banks do not improve access to credit (even for SMEs)
State banks in Argentina and Chile lend less to SMEs than other banks (Clarke et al. forthcoming)
No significant link between state ownership and access to credit in 3000 firms in 30+ countries (Clarke et al. 2001)
State banks do not improve access to credit (continued)
State bank loan growth was slower after Tequila crisis and less responsive to market signals in Argentina, Mexico (Goldberg, Kinney, Dages 2000)
Need for research to answer three questions:
1. Why do countries privatize state-owned banks?
2. What has been the effect of privatization on bank and sector performance?
3. What determines whether the outcome is good or bad?
Hungary, Mexico, Nigeria, Pakistan, Poland, Romania
Govt. Ownership in Case Study Countries
Share of Assets Held by Govt. Banks,1999
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Case Studies Full Sample
Full sample: +/- 110 countries (Barth, Caprio & Levine, 1999, 2003)
Privatization in Case Study Countries
Change in Assets Held by Govt. Banks, 1999-2002
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Case Studies Full Sample
Full sample: +/- 110 countries (Barth, Caprio & Levine, 1999, 2003)
Nine Country Study of SIPs
CroatiaEgyptHungaryIndiaJamaica
KenyaMoroccoThe PhilippinesPoland
(Otchere, 2003)
Why do countries privatize?
Non OECD countries are more likely to privatize when:
Performance of banking sector is poor, Government is fiscally conservative, and Government is more accountable to the
electorateBoehmer, Nash, and Netter 2003
Privatization in Argentina:
Was more likely when: Bank performance was poor After Tequila crisis
Was less likely when: Local banking sector dominated by state banks Banks were overstaffed Unemployment was high Public employees were strong
Clarke and Cull 2002
Countries privatize when:
Political benefits of privatization End to fiscal burden Room/revenues for other spending;
Outweigh political costs – Layoffs Less directed credit Less lending
Privatization may have hidden political costs and benefits
Biggest benefit hidden: the fiscal savings from not having to recapitalize
More prudent lending usually means slower growth in credit
Change in composition of lending will make some interest groups unhappy
Performance
Improve.
Worse Same Some
Improvement
Notable
Improvement
Majority state ownership
Brazil (Restruct).
X-Country
Czech Republic I, Romania, Egypt
Poland I
Minority state ownership
Nigeria I X-Country
Bulgaria, Czech Republic II, Croatia
<10% to zero state ownership
Mexico I Mexico II
Nigeria II
Pakistan, Hungary Argentina, Poland (II), Brazil (Priv.),
Australia
Effects of Residual State Ownership on Performance
Privatization in Mexico driven by politics:
Dominance of PRI Survival of PRI under threat from political
competitors– Salinas electoral margin smallest in PRI history
Need social spending to regain PRI support But fiscal crisis Sold banks to raise funds
Performance
Improve.
Worse Same Some
Improvement
Notable
Improvement
Majority state ownership
X-Country
Czech Republic I, Romania
Egypt
Poland I
Minority state ownership
X-Country
Bulgaria, Cz II
<10% to zero state ownership
Mexico I Mexico II
Nigeria II
Pakistan, Argentina
Brazil Priv.
Hung., Poland II
Australia
Red – Direct sale strategic IGreen – Share offering
Effects of Privatization Methods on Performance
Australia
Suggests performance gains from share issue privatizations depend on: Institutional environment Stock market development
SIP less successful than direct sales
SIP disperses shares widely to minority investors who may have: Poor information Little or no protection of property rights Limited motivation to monitor managers
Performance
Improve.
Worse Same Some
Improvement
Notable
Improvement
Majority state ownership
X-Country
Czech I, Romania
Egypt
Poland I
Minority state ownership
X-Country
Bulgaria, Czech II
<10% to zero state ownership
Mexico I Mexico II
Nigeria II
Pakistan, Argentina
Brazil Priv.
Hungary, Poland II, Australia
Red – Direct sale strategic I Dark Green – Share offering Rose – Direct, no foreigners Lime – Shares, no foreigners
Effects of Foreign Ownership on Performance
Competitive Environment
Privatization pro-competitive in Australia & nine countries in study by Otchere (2003)
Regulatory environment limited improvements in Nigeria to profitability, focus on FOREX & govt. bonds
Governments privatize when state banks are costly
Outside support which reduces fiscal pressures of banks will delay needed reforms
Risk that governments will sell to maximize revenues & raise risk of crises (Mexico)
Outside advice should not encourage such sales by pressuring to reduce fiscal deficit by any means
Best performance when:
Government sells control & minimizes its share
Government sells directly to strategic investors except in strong institutional environments such as Australia’s
Few restrictions on bidders, including foreign investors
What to do about prudential lending?
With poor protection of property rights well governed banks will not lend
Directed credit, subsidies, guarantees, and state owned banks have not been the solution to insecure property rights
Improve property rights & increase information on borrowers
Performance and regulatory environment
Performance better when regulatory environment is stronger Compare efficiency improvements in
Argentina versus Nigeria
But performance still improved in weak regulatory environments
In Conclusion
Done properly, privatization improves bank and banking system