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?

12 Case Studies

Argentina, Brazil, Bulgaria, Croatia, Czech Republic, Egypt,

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

performance