THE ECONOMICS OF BANK PRIVATIZATION
William L. Megginson Professor & Rainbolt Chair in Finance Michael F. Price College of Business
The University of Oklahoma
Preliminary draft November 18, 2003
Prepared for: Conference on Bank Privatization in Low and Middle Income Countries
Sponsored by the Finance Division of the Development Research Group, The World Bank Washington, DC
November 20-21, 2003
Abstract This paper surveys the empirical literature examining bank privatization. We begin by documenting the extent of, theoretical rationale for, and measured performance of state-owned banks around the world, and then assess why many governments have chosen to privatize their often very large state owned banking sectors. The empirical evidence clearly shows that state owned banks are far less efficient than privately owned banks, and that state domination of banking imposes increasingly severe penalties on those countries with the largest state banking sectors. On the other hand, there is little in the empirical record to suggest that privatization alone transforms the efficiency of divested banks, especially when these are only partially privatized. Privatization generally improves performance, but by far less than is typically observed in studies of non-financial industries. An increasingly common outcome of large-scale bank privatization programs is foreign ownership of many nations’ banking sector, which evidence suggests is usually positive in an economic sense, but problematic politically. Please address correspondence to: William L. Megginson Price College of Business 307 West Brooks, 205A Adams Hall The University of Oklahoma Noman, OK 73019-4005 Tel: (405) 325-2058; Fax: (405) 325-7688 e-mail: [email protected] website: http://faculty-staff.ou.edu/M/William.L.Megginson-1
THE ECONOMICS OF BANK PRIVATIZATION
During the past fifteen years, over 250 commercial banks have been fully or partially privatized
by governments of 59 countries either publicly through a public offerings of shares, or privately through
an asset sale. In almost every case, this represented a fundamental break with a national past that
emphasized the strategic role of commercial banking in funding the nation’s economic development, and
the national government’s key role in planning and directing that development.
This survey examines the empirical evidence examining why governments are choosing to
privatize their state-owned banks (SOBs), how they are selling SOBs, and whether these sales have, on
average, achieved the goals set by the divesting governments. As a first step in determining why
governments are privatizing banks, section 1 examines why these banks became state-owned in the first
place; section 2 then asks what caused societies to decide that state owned banking was not a good idea.
Section 3 assesses how governments privatize state-owned banks, while sections 4-6 survey the empirical
evidence regarding bank privatization in, respectively, developed countries, non-transition developing
countries and transition economies. Section 6 evaluates the empirical evidence examining the economic
efficiency of foreign ownership of banks, and then concludes.
1. Why Has State Ownership of Commercial Banks Been So Prevalent Historically?
Economists have debated the relative merits of state versus private ownership for centuries.
Perhaps the key industry has been banking. There is an enormous theoretical and empirical literature on
state versus private ownership of non-financial firms. This is surveyed in Megginson (2004), Chapter 2.
We focus here specifically on how this debate relates to state ownership of commercial banking, since
this is arguably the most basic industry in a modern economy because of its central role in allocating
capital and monitoring corporate borrowers.
Regardless of where they are located, how they are organized, or the structure of their ownership,
banks tend to perform three basic functions in any economic system. First, they play a central role in the
country’s payments system and also serve as a clearinghouse for payments. Second, they transform
claims issued by borrowers into other claims that depositors, creditors, or owners are willing to hold.
Third, banks provide a mechanism for evaluating, pricing and monitoring the credit granting function in
an economy. Of course, the efficiency, safety, effectiveness and transparency of these functions varies
widely across countries depending on, among other things, who owns the banks, how the credit-granting
process is managed and to whom credit is granted, and the degree to which bank-issued claims are held
with some confidence by the non-bank public. In the context of a country with a long history of state
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ownership of commercial banks—or even significant state influence over commercial banking—these
efficiency, safety, and transparency concerns are often infinitely more complex and intractable than is
more laissez-faire economies.
1.1. The Theoretical Case for State Ownership of Banks
During the modern era, proponents of state ownership have justified government control of
business in three principal ways. First, public ownership has been justified as a way to ensure that
business enterprises balance social and economic objectives, rather than focusing exclusively on profit
maximization. Second, state ownership has been motivated as a response to significant market failures—
particularly the challenges posed to economic efficiency by natural monopolies—and as a method to
internalize production externalities such as pollution. Third, proponents assert that public ownership can
be justified under certain conditions involving informational asymmetries between principal (the public)
and agent (the producer), where complete contracts cannot be written and enforced. Underlying all three
cases is the assumption that governments can and do act benevolently, and thus that state ownership is
economically efficient. Certainly, state ownership has also been imposed many times in history by
ascendant political parties specifically in order to redistribute wealth and income from less to more
“deserving” members of society, but this exercise in raw political power is usually justified by dogma,
rather than by serious economic theory.
State ownership of banking both grew from the broader trend towards state ownership and was
driven by specific factors. “Benevolent” reasons include a perceived lack of private capital with sufficient
risk tolerance to finance growth; inadequate funding to sectors and groups with low financial but high
social returns; a desire to promote industrialization and development at a pace more rapid than private
financing would allow; and a desire to maintain domestic control over a nation’s financial system. Less
attractive, but equally compelling reasons include ideology (punishing capitalists), a desire to
disenfranchise politically unpopular groups (postwar France’s perception that main banks collaborated
with Nazi occupiers); a reaction to foreign dominance for newly independent former colonies and a desire
to use banks as tools for political patronage and advantage.
1.2. The Extent of State Ownership in Practice
There can be little doubt that state ownership of banking has proven popular historically. Table 1
shows the extent of government ownership as of the year 1999. This table uses 1999 data, presented in
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Barth, Caprio and Levine (2001), but organizes the countries listed by their commercial legal system, as
suggested by LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1998, 2002).
**** Insert Table 1 about here ****
Several trends can be observed from this table. First, it is clear that state ownership is widespread,
particularly in developing countries. What this cross-sectional listing does not show, however, is that state
ownership has been declining steadily over time, and this has accelerated dramatically since the late
1980s. Second, state ownership is higher in countries with a socialist legal tradition than in any other.
This is hardly surprising, since banks were central tools of control and credit allocation in the command
and control communist system that developed in the Soviet Union after 1917, and was then imposed on
CEE after WWI. These countries began privatizing after winning their independence in 1989, but they
have had insufficient time to completely divest their holdings.
Third, countries with French civil law commercial codes have generally higher state ownership
than those with German or English common law codes. This difference was vastly more pronounced
before 1993, however, when the core French civil law states in Western Europe (France, Spain, Portugal,
Belgium) all had banking sectors that were dominated by state ownership. Beginning with France in
1986-87, however, all these countries launched massive privatization drives and now very few banks
remain in state hands in any of these core civil law countries.
This observation, that the western countries most wedded to state ownership historically have
almost completely privatized their banking sectors, brings up the natural question: Why did the most
enthusiastic supporters of state-owned banking decide to divest their ownership, and why did other less
enthusiastic countries also launch significant banking privatization programs during the past two decades?
2. Why Have Governments Launched Bank Privatization Programs?
As discussed briefly above, huge segments of the global banking system have been transferred
from state to private hands over the past two decades, and much more is poised to do so in the near
future—particularly in the emerging powerhouses of India and China. What has caused this fundamental
reassessment of state ownership of banking? Two factors stand out as especially important. First,
compelling and overwhelming evidence began to accumulate showing that state ownership was not
working as planned. The second, factor was a dawning realization that this really mattered—that financial
system development promoted economic growth. We look at each influence below.
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2.1. Motives for Commercial Bank Privatization
Not all commercial bank privatizations are similarly motivated. At least four reasons for bank
privatization can be identified in countries around the world. First, in formerly socialist economies,
privatization has occurred on a widespread scale in many industries, as discussed in detail in Megginson
and Netter (2001). In these situations, bank privatizations occur as part of the overall transitioning to a
more market-based economic system. However, these countries also provide the biggest challenge to
successful privatization because so much of the credit previously provided by the monobank systems was
granted to SOEs, which tend to be of very poor credit quality. As such, banks in transition economies
tend to be plagued with the greatest loan quality problems of all bank privatizations.
Second, in some countries there may be a program underway to de-nationalize the limited number
of sectors or firms that are state-owned. In such situations, privatization is less likely to offer as great a
challenge, at least in the loan quality area. Third, in some economies there may be ongoing efforts to
deregulate the overall financial system. In this regard, bank privatizations are a necessary ingredient of
the overall deregulation effort. Finally, the governments in some countries may have the primary
objective of raising funds for the government itself. As such, banks may simply be one of the vehicles in
the “revenue privatization” motive.
2.2. The Theoretical Case against State Ownership of Banks
Economists have offered three principal reasons why state ownership will be inherently less
efficient than private ownership, even under the assumption of a benevolent government owner. First,
SOE managers will have weaker and/or more adverse incentives than will managers of privately owned
firms, and thus will be less diligent in maximizing revenues and (especially) minimizing costs. Second,
state enterprises will be subject to less intense monitoring by owners, both because of collective action
problems--potential monitors have less incentive to carefully observe managerial performance because
they bear all the costs of doping so but reap only a fraction of the rewards--and because there are few
effective methods of effectively disciplining SOE managers in the event that sub-par performance is
detected. Third, the politicians who oversee SOE operations cannot credibly commit to bankrupting
poorly performing SOEs, or even to withholding additional subsidized funding, so state enterprises
inevitably face soft budget constraints. It bears repeating that these criticisms of state ownership are valid
even if one grants that the politicians who create and supervise public enterprises have benevolent
intentions.
The final, and in many ways most compelling, critique of state ownership is that SOEs will be
inefficient by design, since they are created specifically so that politicians can use them to benefit their
own supporters at the expense of another group in society. Numerous researchers—including Jones
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(1985), Vickers and Yarrow (1988, 1991), Stiglitz (1993), Nellis (1994), Shleifer and Vishny (1994),
Boyko, Shleifer and Vishny (1996a,b), Shleifer (1998), Sappington and Sidak (1999) and Shirley and
Walsh (2000)--note that state enterprises can be remarkably effective tools of redistributive politics. Since
state firms answer to political masters, rather than the market, wide divergences from profit-maximizing
behavior are not only possible, they are in fact desired. Even in fully competitive markets, Shleifer and
Vishny (1994) show that SOEs will be inefficient because politicians force them to pursue non-economic
objectives, such as maintaining excess employment, building factories in politically (but not
economically) desirable locations, and pricing outputs at below market clearing prices.
2.3. The Empirical Evidence on State Ownership of Commercial Banks
In his survey of the empirical evidence on state ownership of non-financial enterprises,
Megginson (2004) asks, “Given the large number of empirical studies produced during the last fifteen
years, has empirical research generated a conclusive answer regarding the relative efficiency of state
versus private ownership?” He concludes that, “fairly clearly, it has, and the answer is that private
ownership must be considered superior to state ownership in all but the most narrowly defined fields or
under very special circumstances. The empirical evidence clearly supports this conclusion—see, in
particular, Dewenter and Malatesta (2000) and Djankov and Murrell (2002)—and the only major recent
studies surveyed by Megginson that do not unequivocally support private over state ownership are Kole
and Mulherin (1997) and Kwoka (2002). Even their results do not favor state ownership but rather
demonstrate only that private ownership is not always superior.”
Does the evidence regarding state ownership of banking point to a similar conclusion? Table 2
details the empirical evidence on state versus private ownership of banking, and the overall picture that
emerges is extremely damaging for proponents of government ownership. One of the first studies is
Bhattacharya, Lovell and Sahay (1997), who employ data envelope analysis to examine the relative
efficiency of 70 state-, foreign- and privately-owned banks in India during the early stages (1986-1991) of
liberalization. Prior to 1970, only one bank in India was state-owned, but a wave of nationalizations in
that year and in 1980 created a banking system that was dominated by government-owned institutions.
They find that, during the study period, publicly-owned banks are the most efficient and privately-owned
banks the least efficient at delivering financial services to customers. However, their most striking finding
is that foreign-owned banks increase market share significantly during this period, primarily at the
expense of state banks. These results are rather surprising, since studies of the relative efficiency of state-
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owned, mixed and privately-owned non-financial enterprises in India show diametrically opposite
results.1
**** Insert Table 2 about here ****
LaPorta, Lopez-de-Silanes, Shleifer (2002) examine the importance and impact of state
ownership in this key industry. Using data from 92 countries, they examine whether government
ownership of banks impacts the level of financial system development, rate of economic growth, and
growth rate of productivity. They test whether government ownership of banks is motivated by
benevolent, “development” objectives or by redistributive “political” objectives. They find that
government ownership is extensive, especially in the poorest countries. They also find that these holdings
retard financial system development and restrict economic growth rates, mostly due to the impact of state
ownership—and the monopoly power frequently attendant thereto--on productivity. Higher government
ownership in 1970 is associated with significantly slower subsequent financial development and lower
growth in per capita income and productivity. This evidence supports the political view of state ownership
of banks.
Bonin, Hasan and Paul Wachtel (2002) examine the impact of ownership structure (state, private
and foreign ownership) on bank performance in the six transition economies of Bulgaria, Croatia, the
Czech Republic, Hungary, Poland and Romania. Their sample has 222 observations with financial and
ownership data from these six countries for the years 1999 and 2000. About three-quarters of the banks
are fully private and about 40 percent of these are completely foreign owned. Not surprisingly, wholly
foreign-owned banks tend to be created by greenfield investment, while the majority foreign-owned banks
tend to be banks privatized to a foreign strategic investor. Almost 60 percent of the banks in the region
are at least majority foreign-owned, while less than 15 percent remain majority state-owned. These
authors find robust evidence that profitability—measured by return on assets and return on equity-- is
higher for fully private banks than for banks with some state ownership, and is the highest of all for
wholly foreign-owned banks. Foreign banks also experience the most rapid increase in customer loans.
Barth, Caprio and Levine (2003) use a new database on bank regulation and supervision in 107
countries to assess the relationship between specific regulatory and supervisory practices and banking-
1 In particular, Majumdar (1996) shows that Indian SOEs are vastly less efficient than private firms of comparable size. Using industry-level survey data, evaluates the performance differences between SOEs, MEs, and privately-owned Indian companies for the period 1973-1989. SOEs and MEs account for 37% of employment and 66% of capital investment in India in 1989. Document efficiency scores averaging 0.975 for privately-owned firms, which are significantly higher than the average 0.912 for MEs and 0.638 for SOEs. State sector efficiency improves during concerted “efficiency drives” but declines afterwards.
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sector development, efficiency, and fragility. They also examine the relationship between state ownership
and these measures of banking-sector development. They find that government ownership of banks is
negatively correlated with favorable banking outcomes and positively linked with corruption. However,
government ownership does not retain an independent, robust association with bank development,
efficiency or stability when other features of the regulatory and supervisory environment are controlled
for. On the other hand, there is certainly no evidence, even in weak institutional settings, that
government-owned banks are associated with positive outcomes.
Sapienza (2003) studies the effects of government ownership on bank lending behavior using
information on the pricing of individual loan contracts between Italian banks and customers over the
period 1991 to 1995. He exploits the fact that all Italian banks have access to an unusually detailed and
informative database on corporate borrowers, which negates the impact of differential credit evaluation
skills on the loan pricing decision. He further controls for within-sample differences by examining a
matched set of 110,786 company-bank-year observations of lines of credit extended to 6,968 companies.
55,393 observations refer to borrowers from state-owned banks and 55,393 refer to borrowers from
privately owned banks. Sapienza finds that borrowers from state-owned banks pay an average of 44 basis
points less than do borrowers from private banks. He also shows that the voting pattern of the region
where the loan is booked and the party of the state bank’s CEO significantly influence the price of loans.
These results strongly support the political view of state bank ownership over the competing social and
agency cost views.
Cornette, Guo, Khaksari and Tehranian (2003) examine performance differences between
privately-owned and state-owned banks in sixteen Far East countries from 1989 through 1998. They find
that state-owned banks are significantly less profitable than privately owned banks due to state banks’
lower capital ratios, greater credit risk, lower liquidity and lower management efficiency. While the
performance of all banks deteriorated significantly at the beginning of the Asian economic crisis in 1997
and 1998, state banks’ performance deteriorated more than did that of private banks and performance
differences are most acute in those countries where government involvement in the banking system is the
greatest. Economic growth is also slower in these countries, and there is less financial development.
In sum, the weight of empirical evidence now clearly suggests that state ownership of commercial
banks yields few benefits, yet is associated with many negative economic outcomes. Whatever the
motivations once were for launching state-owned banks, this experiment in state planning must now be
considered a systemic failure, and this conclusion helps explain why so many governments have launched
large-scale bank privatization programs. We are thus almost ready to analyze how governments privatize,
and assessing which specific institutions are selected for divestment. Before doing so, however, we
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should briefly examine the role state-owned banks play in the problem of soft budget constraints for
current or former SOEs.
2.4. State-Owned Banks and Soft Budget Constraints: Theory and Evidence
If the managers of a private firm are not operating efficiently, they will be replaced either by the
current shareholders or as the result of a hostile takeover. If a private firm cannot compete effectively,
suppliers of capital will cease funding the company’s operations--and in the extreme the firm will be
forced into bankruptcy and liquidated. What are the equivalent public sector disciplinary tools? Empirical
evidence suggests that SOE managers are rarely punished individually for poor performance, but what
about withholding of capital resources? In real life, the state is unlikely to allow a large SOE to face
bankruptcy, thus the discipline enforced on private firms by the capital markets and the threat of financial
distress is lacking for state-owned firms. Since managers of less-prosperous state firms know they can
rely on the government for funding, these firms are said to face “soft” budget constraints.
Kornai (1988, 1993, 1998), Berglof and Roland (1998), Lin, Cai and Li (1998), Frydman, Gray,
Hessel, and Rapaczynski (2000) and several other authors all suggest that soft budget constraints (SBCs)
were a major source of inefficiency in Communist firms, and that these SBCs have continued through
much of the post-communist transition period. Soft budget constraints are not limited to transition
economies, however. Sheshinski and Lopez-Calva (1999) assert that public ownership inevitably leads to
SBCs. They present a simple model showing that governments will choose to extend subsidies to failing
state enterprises whenever the political costs of allowing a SOE to go bankrupt outweigh the political
costs of subsidization. In addition to inhibiting efforts by politicians to impose hard budget constraints,
this fear of financial distress can also preclude initiatives to force state enterprises to restructure, or to
open monopolized industries to private-sector competition. Since large SOEs are too big and too
politically important to fail, their very weakness protects them from the type of effective discipline to
which private firms are continuously subjected.
Much of the empirical evidence on soft budget constraints examines whether it is in fact possible
to impose hard budgets constraints on loss-making SOEs and, if so, whether this improves corporate
performance. Numerous articles examine whether soft budget constraints are a problem in transition
countries. However, in this section we discuss only those studies that employ either multi-national
samples or particularly extensive single-country samples and are thus most generalizeable. These studies
are summarized in Table 3. A complete listing and analysis of all studies of SBCs is presented in chapters
2 and 5 of Megginson (2004).
**** Insert Table 3 about here ****
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A very important study of the effects of SBCs in transition economies is Frydman, Gray, Hessel
and Rapaczynski (2000), who examine whether the imposition of hard budget constraints is alone
sufficient to improve corporate performance in the Czech Republic, Hungary and Poland. They employ a
sample of 216 firms, split between state-owned (31%), privatized (43%), and private (26%) firms, and
find that privatization alone adds nearly 10 percentage points to the revenue growth of a firm sold to
outside owners. Most important, they find that the threat of hard budget constraints for poorly performing
SOEs falters, since governments are unwilling to allow these firms to fail. The brunt of SOEs’ lower
creditworthiness falls on state creditors.
Bertero and Rondi (2000) employ a sample of 150 Italian manufacturing SOES, with 1,278 firm-
year observations, to examine whether imposition of a hard budget constraint can improve SOE
performance. They exploit the fact that the fiscal environment became much tighter for Italian state
enterprises during the late 1980s, as budget deficits became larger and the public debt reached
unsustainable levels. They find that the SOE firms’ responses to increased debt during the hard budget
constraint period, 1988-93, is consistent with financial pressure, but is not during the soft budget
constraint period of 1977-87. Only during the later period do firms respond to financial pressure by
increasing total factor productivity and reducing employment. In other words, when hard budget
constraints can be credibly imposed on SOEs, they do promote greater efficiency even in the absence of
ownership changes.
Lizal and Svejnar (2001) examine strategic restructuring and new investment performance of
4,000 Czech companies during 1992-98. Dataset includes over 83,000 quarterly observations. Develop
and test a dynamic model of restructuring and investment, allowing them to examine separable impact of
private versus public and domestic versus foreign ownership on restructuring, as well as the importance of
access to credit and a soft budget constraint on firm investment. Find that (1) foreign owned companies
invest the most and (domestically owned) cooperatives the least; (2) private firms do not invest more than
state-owned firms; (30 cooperatives and small firms are credit rationed; and (4) SOEs operate under a soft
budget constraint.
Coricelli and Djankov (2001) identify the presence of soft budget constraints and analyze their
impact on enterprise restructuring in Romania during the initial transition period. They employ a simple
analytical model and a sample of 4,429 enterprises with data from 1992-95 to test whether hardening
budget constraints promotes beneficial restructuring and new investment or whether access to external
financing is required to promote new investment. They find that hard budget constraints (HBCs) do
promote passive restructuring, in the form of labor shedding, but not new investment. Active restructuring
requires access to external financing. Tightened bank credit can induce HBCs and raise enterprise
efficiency in the short-run, but at the cost of curtailing investment.
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Cull, Matesova and Shirley (2002) examine the incentives that managers of voucher-privatized
Czech companies have to “tunnel” (strip assets out of companies at the expense of outside shareholders)
and “loot” their companies. Looting occurs when firms face a soft budget constraint and managers are
able to borrow heavily, extract funds from the firm, and then default on the debt without penalty. They
employ a dataset with 1,017 observations from 392 companies spread nearly evenly between 1994 and
1996. Half of the firms are voucher-privatized joint stock companies (JSCs) while half are limited liability
companies (LLCs). Controlling for size, industry, capital intensity and initial leverage, they find that
voucher-privatized JSCs perform significantly worse than firms with concentrated ownership that had to
be purchased for cash. Investment fund-controlled JSCs under-perform all other firms, including other
JSCs, while fund-controlled JSCs also took on liabilities at a much faster rate than other firms, indicating
they were operating under a soft budget constraint. Though not able to measure the activity directly, they
conclude that the evidence indirectly shows that looting was a widespread occurrence for many JSCs.
2.5. Evidence on the Importance of Financial System Development in Promoting Economic Growth
In addition to dissatisfaction with the observed performance of state-owned banks, governments
have one additional and powerful reason to discard any financial sector development model that is shown
to be flawed. There is now little doubt that the financial sector in general, and banking in particular, plays
an important role in fostering the economic development of a nation. Rajan and Zingales (1998) provide
evidence supporting the positive influence of financial development on economic development by means
of reducing the cost of external financing to firms. They find that financial development is especially
important for the process of creating new firms in an economy.
Levine and Zervos (1998) also provide evidence suggesting that banking efficiency is critically
important to the development of an economy and that banking services are different from those provided
by stock markets. In fact, an entire stream of research has now emerged documenting the critical
importance of an efficient financial system to sustainable economic growth. Important recent papers in
this literature are Demirgüς-Kunt and Maksimovic (1996, 1998), Levine (1997), Demirgüç-Kunt and
Huizinga (1998), Wurgler (2000), Cetorelli and Gambera (2001) and Beck, Demirgüç-Kunt and Levine
(2003). Related papers stress the importance of creating the proper legal and regulatory framework for
encouraging the development of efficient, liquid banking and capital markets. This literature is largely
encompassed in a series of articles by La Porta and Lopez-de-Silanes (1999) and La Porta, Lopez-de-
Silanes, Shleifer, and Vishny (1997, 1998, 2002).
The basic themes that emerge from these research streams are that an efficient financial system is
vital, and that it is very difficult to construct from scratch or in place of existing (typically less effective)
systems, due to the determined opposition from entrenched parties. The most important source of
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opposition to development of a modern, non-politicized financial system is usually the state--and those
with close ties to the existing power structure. This fact makes banking privatization at least as important
as a tool of political economy as it is as a mechanism for banking reform.
2.4. How do Governments Select Banks to be Privatized?
Two studies examine the determinants of privatization choice—or which banks governments will
choose to sell and under what conditions. Clarke and Cull (2002) examine the political economy of sales
of thirteen banks by Argentine provincial governments after the passage of the April 1991 Convertibility
Act. They find that (1) poorly performing banks are more likely to be privatized than those performing
well; (2) overstaffing tends to reduce the probability of privatization because the post-sale staff cuts
needed will be too politically painful; (3) larger banks are less likely than smaller banks to be privatized;
(4) higher levels of provincial unemployment and higher shares of public employees reduces the
likelihood of privatization; and (5) the onset of the Tequila Crisis in 1995 increased the likelihood of
privatization by raising the financial costs of continued state bank subsidization. In other words, both
economic and political factors impact the privatization decision for individual banks, but political buyoffs
seemed especially important factors.
Boehmer, Nash and Netter (2003) use their comprehensive sample of bank privatizations from 51
countries to examine how political, institutional and economic factors relate to a country’s decision to
privatize its state owned banks. They specifically examine whether the determinants of banks
privatization are the same in OECD and non-OECD countries. They find that, in non-OECD economies,
bank privatization is more likely the lower the quality of the nation’s banking sector, the more right-wing
the government is, and the more accountable the government is to its people. None of these factors is
significant in developed economies; instead poor fiscal conditions are the most important determinants of
bank privatizations in OECD countries.
3. How do Governments Privatize State-Owned Banks?
The problems inherent in a state-owned banking industry have led many countries to at least
consider privatizing state-owned banks. Wherever and however banks are privatized, they all face a
common set of concerns and issues. These include: (1) the type of privatization process to utilize: asset
sale or public share offering; (2) whether and how to break up the government-owned banking systems,
especially the monobank systems of former socialist transition economies; (3) dealing with an extremely
low-quality loan portfolio, much of which is in default--albeit likely to be unrecognized on a financial
reporting basis; (4) ensuring an enhanced level of managerial talent in the system, and (5) ultimately
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attracting outside (often foreign) capital and expertise to the banking system. We examine the choice of
privatization method below, and then discuss the other issues governments face in subsequent sections.
3.1. Methods of Privatization
Governments usually choose one of three techniques to privatize: Asset sales, share-issue
privatizations, or voucher privatizations. With an asset sale, the government sells ownership of the state-
owned enterprise (SOE) to an existing private firm or to a small group of investors. This is similar to the
traditional use of the private capital market in non-SOE transactions. The government may sell a fraction
or all of the SOE through an asset sale. Typically, these asset sales are implemented through an auction,
although governments sometimes sell SOEs directly to private investors. Lopez-de-Silanes (1997) and La
Porta and Lopez-de-Silanes (1999) describe a very important national privatization program (Mexico) that
relied almost exclusively on asset sales, and Lopez-de-Silanes and Zamarippa (1995), Unal and Navarro
(1997), Gruben and McComb (1999) and Haber and Kantor (2003) show that Mexico’s banks were all
privatized using auctions (a form of asset sale) during the early 1990s.
In share-issue privatizations (SIPs), the privatizing government sells equity shares in the public
capital market both to retail and institutional investors. SIPs are the largest and most economically
significant of all privatizations, and account for the preponderance of the value of assets privatized
outside communist and formerly communist countries. Jones et al. (1999) report that through 1997,
governments in 59 countries raised over $446 billion through 630 SIP transactions. Bank privatizations in
OECD countries, and the very largest sales in developing countries, tend to be SIPs. For example, all of
the privatizations studied by Verbrugge, Megginson and Owens (1999) and Otchere (2003) are SIPs.
Formerly communist Eastern European nations such as Russia, Poland, and the Czech Republic
have primarily used voucher privatizations. Voucher privatizations are similar to SIPs, in that shares of
ownership are distributed broadly. However, in this method of privatization, the government distributes
vouchers (paper claims that are exchanged for ownership in previously state-owned firms) to each citizen.
These vouchers are usually free or very low in price and are available to most citizens. Thus, voucher
privatizations result in assets virtually being given to citizens. In a sense, they are SIPs offered at a very
low price. Bank privatizations using vouchers are examined in xxx.
3.2. The Record of Bank Privatizations
The empirical record suggests that no one form of sale is the “standard” or default method of
divesting state owned banks. The most comprehensive bank privatization study, that of Boehmer, Nash
and Netter (2003, hereafter BNN), examines 270 transactions from 51 countries over the period 1982-
2000, which raised a total of $119 billion for divesting governments. BNN find that 46.7 percent of these
13
sales are executed using SIPs, while the remaining 53.3 percent employ asset sales. The average (median)
transaction raises $442 million ($15 million) and involves the sale of 47.7 percent (41 percent) of the
bank’s total capital. This is but the first of many pieces of evidence suggesting that governments are very
hesitant to surrender effective control of the banks they are “privatizing,” much less divest them
completely.
Megginson (2004, Table 9.4) presents similar overall statistics regarding the bank privatizations
in his sample, which is reproduced here as Appendix 1. He documents that governments raised $142.9
billion through 144 public share offerings and 139 private sales between January 1987 and August 2003.
The SIPs raised $76.2 billion, an average of $529.1 million each, while the assets sales raised an average
of $479.9 million each, for a total of $66.7 billion. In almost every case, this represented a fundamental
break with a national past that emphasized the strategic role of commercial banking in funding the
nation’s economic development, and the national government’s key role in planning and directing that
development. The summary tables from BMN and Megginson are reproduced here as Table 4.
**** Insert Table 4 about here ****
4. Empirical Evidence on Banking Privatizations in Developed Countries
Unlike privatizations of non-financial firms, where a substantial body of significant literature and
empirical evidence has emerged, relatively few empirical analyses of bank privatizations have been
generated, and most of these have been published (or publicized) only very recently. This is somewhat
surprising since banks, or least the banking function, is indispensable in all economies. At the same time,
it is not unexpected since data on banks that have been privatized are so difficult to obtain, especially
regarding financial performance before and after privatization. Furthermore, banks have always been one
of the favorite tools of politicians and governments employ to channel funding to chosen sectors,
industries and firms on highly favorable terms. As such, they are even more opaque than usual for an
industry that under the best of circumstances suffers from lack of transparency in financial reporting.
Nonetheless, over two-dozen empirical studies of bank privatizations have been generated since
1998, and we survey these studies in this and the following two sections. This section discusses empirical
studies of bank privatizations in developed countries (defined as countries that were OECD members in
1990), while section 5 surveys studies of privatizations in non-transition developing countries and section
6 discusses empirical analyses of bank divestments in the transition economies of Central and Eastern
Europe (CEE) and the former Soviet Union. (FSU).
Four studies examine the effectiveness of bank privatization in OECD countries, and these are
summarized in Table 5. Two of these are multi-national studies, while the other two examine the
14
experience of individual countries. Verbrugge, Megginson and Owens (2000, hereafter VMO) study the
offering terms and share ownership results for 58 unseasoned (IPOs) and 34 seasoned offerings by 65
banks that were fully or partially privatized from 1981 to 1996. They then compare pre and post-
privatization performance changes for 32 banks in OECD countries and five in developing countries.
VMO document moderate performance improvements in OECD countries; ratios proxying for
profitability, fee income (non-interest income as fraction of total), and capital adequacy increase
significantly, while leverage ratio declines significantly. They also find significantly positive initial
returns to IPO investors On the other hand, VMO document large, ongoing state ownership, with very
few governments selling majority control of their banks—and even fewer selling their entire ownership
stake.
**** Insert Table 5 about here ****
Gleason, McNulty and Pennathur (2003) examine the short and long-term stock returns to
successful bidding firms that participate in the purchase of a financial service firm being privatized. They
study bidders that are US-based or have stock traded in a US market and examine 86 transactions from
1980 through 2002, though most sales occur between 1995 and 1998. They find that the cumulative
abnormal returns (CARs) to bidding firm shareholders is positive around the date of the announcement,
but that this short-run superior performance is not sustainable over longer periods. While the long-run
CARs are (insignificantly) negative, the authors find that bank bidders are able to significantly reduce
their systematic risks, relative to the home market, following such acquisitions.
Braz (1999) examines the nationalization of Portugal’s private banking system following a
military coup in 1974, as well as the “re-privatization” of these same banks after 1990. He describes the
(multiple) objectives of the Portuguese government in launching this bank privatization program, and also
discusses the primary method of sale (public offer) and offer terms of these divestitures. Drawing on both
his own analyses and other published work, Braz shows that (1) the productive efficiency of privatized
banks increased significantly after divestiture, with assets per worker showing an especially large
differential increase; (2) privatized banks reduced staff at a significantly more rapid rate than did public
banks; and (3) privatized banks experienced significantly more rapid growth in their branch networks than
did state banks. He concludes by offering several “lessons” for government officials weighing the
privatization of their nation’s banking system.
Finally, Otchere and Chan (2003) perform a clinical analysis (case study) of the impact that
Commonwealth Bank of Australia’s (CBA’s) privatization had on the bank itself as well as on its
domestic rivals. The initial sale of CBA was executed in 1991, and the bank was fully divested in 1996.
They find that (1) the stock prices of major rival banks reacted negatively to CBA’s sales, with especially
15
negative reactions to the initial and final sales; (2) CBA’s long-run stock price performance is
significantly positive, and increases steadily as the government’s ownership stake declines; (3) the
financial and operating performance of CBA improves significantly after privatization, and surpasses that
of its major rivals.
In sum, the evidence from developed countries is that bank privatization yields significant
performance improvements, though these seem to be smaller and less pervasive than the improvements
typically documented in studies of non-financial company privatizations in OECD countries. We now
assess the privatization experiences of non-OECD countries.
5. Empirical Evidence on Banking Privatizations in Non-Transition, Developing Countries
Several papers describe bank privatizations in non-transition developing countries, though only
three of these actually perform empirical analyses of privatization’s impact. These three are summarized
in table 6. Two of these are multi-national studies, while the third examines the national experience of
Nigeria. Boubakri, Cosset, Fischer and Guedhami (2003) examine the post-privatization performance of
81 banks divested in whole or (much more frequently) in part by governments of 22 developing countries
over the period 1986-1998. They find that (1) privatization alone does not seem to significantly impact
profitability or operating efficiency; (2) ownership type and industry concentration significantly impacts
risk taking behavior by privatized banks, with banks controlled by industrial groups taking the highest
risk exposure, followed by locally controlled banks and with foreign owned banks taking the least
exposure; (3) foreign owned banks have lower net interest margins than do locally owned banks,
suggesting that foreign ownership makes a significantly greater contributions to a divested bank’s
economic efficiency.
**** Insert Table 6 about here ****
The second multi-national study, Otchere (2003), performs a similar pre- versus post-
privatization analysis of operating performance changes, as well as an assessment of stock price
performance, for 21 banks privatizations (18 unseasoned and three seasoned offerings) in low and middle
income countries from 1989 to 1997. He also computes the same measures for 28 rival firms for
comparison purposes. He finds that privatization announcements elicit significantly negative stock price
reactions from rival banks, which are more negative the larger the state ownership fraction that is
divested. These findings support the “competitive effects” hypothesis and suggest that investors view
privatization announcements as foreshadowing bad news for rival banks. On the other hand, Otchere finds
that the privatized bank stocks significantly under-perform their respective stock markets, and these
16
returns are also (insignificantly) lower than those achieved by rival bank stocks. He also finds little
evidence of significant improvements in the operating performance of privatized banks.
The third empirical study, Beck, Cull and Jerome (2003), examines the effect of privatization on
performance using an unbalanced panel of 69 banks with annual data for the period 1990-2001. The
authors focus on the nine banks that were completely privatized during this period. They document a
significantly positive impact from privatization, even in a macroeconomic and regulatory environment
that was inhospitable to financial intermediation. Privatization helped close the very wide gap between
the performance of state-owned banks and private banks in Nigeria, though the performance of divested
firms never surpassed that of private banks.
In addition to these three empirical studies, there are numerous descriptive analyses of bank
privatization programs in developing countries, particularly in Latin America. Clarke and Cull (2003)
develop a simple theory that models the inherent tradeoffs between sales price offered, layoffs allowed
and loan portfolios guaranteed faced by governments and potential buyers in privatization transactions
involving banks. They then test this model using data drawn from 15 provincial Argentine bank
privatizations during the 1990s. They find that provinces with high fiscal deficits were willing to accept
layoffs and to guarantee a larger fraction of the privatized bank’s portfolio in return for a higher price.
The Tequila Crisis also forced politicians to protect fewer jobs and retain a higher share of public banks’
assets in a residual entity.
Baer and Nazmi (2000) describe the origins of Brazil’s state and private banks and examines how
the decades of inflation produced distortions in how they functioned. They then describe how the Real
Plan’s success in halting inflation--which was good for the overall economy—severely impacted the
profitability (even the viability) of both state and private banks in Brazil and led the state and national
governments to take increasingly desperate steps to rescue the banking system from collapse. Ness (2000)
and Makler (2000) present similar discussions of the Brazilian banking system’s evolution and outlook.
Brock (1999) describes and examines Chile’s two bank privatization programs. The first program
was implemented in 1975, soon after the Allende government was overthrown, and used highly leveraged
direct sales—primarily to the banks’ previous owners. This program ended in failure after the Debt Crisis
broke out in 1982, when the Central Bank was forced to close or renationalize most of the privatized
banks. The second, and much more successful, program began in 1985 and employed mostly public share
offerings targeted at small investors and offered on very favorable terms. Brock describes the difficulties
faced by the Chilean government, and especially the Central Bank, in re-capitalizing and then re-
privatizing the nation’s banks and other financial institutions, though these efforts were ultimately far
more successful than those in other Lartin American countries.
17
Four studies--Lopez-de-Silanes and Zamarippa (1995), Unal and Navarro (1997), Gruben and
McComb (1999) and Haber and Kantor (2003)--examine Mexico’s highly controversial bank
privatization program, which began in 1991and ended five years later in default and collapse. All of the
authors show that the Mexican government, which had first seized all private banking assets in a foolish
nationalization in 1982, deliberately structured the 1991 privatization sales to maximize the proceeds
received by the national treasury, regardless of buyer competency or the need to promote sound banking
practices. The government implicitly promised to allow the new owners to achieve high profits by
protecting domestic banks from competition, by allowing the newly private banks to use very forgiving
accounting rules, and by practicing an extreme form of regulatory forbearance. The resulting boom in
domestic borrowing masked fundamental flaws in the banking system created by this privatization
program, and the system collapsed completely after the disastrous December 1994 devaluation of the
Mexican peso. The banking system then had to be re-capitalized at great cost to Mexico’s taxpayers, and
by 2001 foreign banks controlled over 60 percent of the country’s banking assets.
All in all, the empirical record on banking privatization in non-transition developing countries
does not offer overwhelming support for the idea that privatization alone can improve the (usually
dreadful) financial and operating performance of state-owned banks. Simply selling off state banks seems
to yield only negligible improvement, and poorly designed privatizations (i.e., Mexico’s) can backfire
badly. On the other hand, empirical evidence also shows that leaving banks under public ownership is an
even worse strategy, given the state’s dismal fiduciary record. We now conclude our assessment of bank
privatization’s empirical record by examining how these sales have worked in the transition economies of
Central and Eastern Europe and the former Soviet Union.
5. Empirical Evidence on Banking Privatizations in Transition Countries
Bank privatizations in CEE and FSU economies differ significantly from bank sales elsewhere in
two important respects. First, these sales involved a transformation from a socialist command economy,
in which banks played a central coordinating and credit-rationing mode, to a market economy in which
banks are expected to have vastly different functions. Second, many banks were sold through voucher
privatizations. Ensuring a smooth shift from state-owned banks to private banks is difficult even in mixed
capitalistic systems where only a few sectors, like banking, may have been nationalized. Smooth shifts in
the banking sector in economies that are virtually completely state-owned (transition economics) are
devilishly difficult.
A number of theoretical and empirical papers outline the special difficulties encountered by banks
in transition economies. Perotti (1993) shows theoretically that banks in these countries have a strong,
18
perverse incentive to fund large former debtors, although these state-owned enterprises (SOEs) are less
efficient and more risky than private firms, because by doing so they gain the potential repayment of
previous debts. This inevitably leads to lower productivity of investment and a greater concentration of
risk. Furthermore, since privately owned banks feel this incentive just as strongly as state-owned ones,
merely privatizing the banking industry will not solve the problem. The incentive to subsidize former
debtors is, however, magnified in the all-too-frequent case where the state retains significant influence
over the banks or the debtor companies (or both) after these are nominally privatized. Perotti concludes
that liquidation of economically hopeless SOEs will generally be preferable to eternal subsidization, since
this will both recognize the true value of the debt and remove the “debt overhang” from banks so they can
increase their lending to the more dynamic private sector.
Saunders and Sommariva (1993) analyze the difficulties of transitioning from state control to a
market system with specific reference to Eastern Europe. They investigate alternative approaches for
restructuring troubled commercial banks. Beginning with a pure bankruptcy approach, which they reject
as a viable alternative, they address various restructuring approaches including recapitalization, “loan
hospitals” (bad bank approach), and various types of debt-for-debt and equity-for-debt exchange. They
also discuss the use of some of the approaches used in other countries, like the RTC for the savings and
loan debacle in the United States. Their analysis demonstrates clearly the difficulty of managing and
dealing with only one problem in the bank privatization process, namely the troubled loan issue in the
monobank systems.
Bonin and Wachtel (1998) provide an excellent analysis of the difficulties of achieving market-
based banking systems in transition economies. They emphasize that bank privatization is only one step
in the always painful process of disengaging the state from virtually complete control over the banking
system. In a later study, Bonin and Wachtel (2002), these same authors examine the structure of the
banking sectors of six transition countries in which privatization of state-owned banks is well advanced.
Their most striking finding is that foreign banks now dominate banking in Hungary, Poland, the Czech
republic, Croatia and Bulgaria—and are making substantial inroads in Romania. The rise of foreign bank
ownership is at least partly a result of the essential failure of domestic ownership to satisfactorily address
the financial problems of borrowers (especially SOEs) in transition countries or to impose hard budget
constraints that would force these firms to restructure. Commander, Dutz and Stern (1999) show that this
failure to restructure had an especially woeful impact on the post-privatization performance of firms in all
transition economies, but particularly the former Soviet republics.
Meyendorff and Snyder (1997) study the “transactional structures” of banking privatizations in
Central and Eastern Europe, which they define as having three elements: (1) antecedent actions that
determine the characteristics of the unit being privatized; (2) ownership transfer and governance after
19
privatization; and (3) follow-on actions and ongoing government intervention. They note that most of the
governments in the region made similar policy choices when they began privatizing their banking
systems, which have proven highly influential over time. As examples, most governments chose not to
seriously break up the socialist monobank system, and most severely restricted new competition—
particularly from foreign banks. For these reasons, the former monobanks retain dominant market shares
in most of the transition economies almost a decade after reforms were initiated. Further, none of the
politically feasible ownership transfer methods (voucher privatization, insider sales) brought in new
capital or talent, so all the region’s banking systems remain weak and noncompetitive. The prospect of
EU membership in the foreseeable future does, however, offer some hope that true restructuring might
begin soon.
The same special issue of the Journal of Comparative Economics in which Meyendorff and
Snyder’s paper appears also presents three case studies of specific bank privatizations in transition
economies. Abarbanell and Bonin (1997) study the 1993 privatization of Poland’s Bank Slaski in a mixed
asset sale (to ING) and public offering. They suggest that this experience show the benefits of attracting a
strategic foreign investor, but also highlight the drawbacks of pursuing this strategy too obsessively.
Abarbanell and Meyendorff (1997) describe Russia’s disbanding of Zhilotsotsbank and the subsequent
creation of its private successor, Mosbusinessbank, in a way that left incumbent mangers largely in
control of the bank’s strategy and operations. They describe how the Russian government’s bank
privatization and deregulation policies have engendered a system that is 75 percent private and
surprisingly innovative—but also highly unstable. Finally, Snyder and Kormendi (1997) describe the
1992 voucher privatization of Komercni Banka, the Czech Republic’s largest bank, in a way that left the
state in effective control of the company’s operating and lending policies. These authors show that this
decision to pass up an opportunity to create a strong private bank and to harden budget constraints for
borrowers was to have lasting, negative consequences for the bank and the nation.
In sum, the evidence from transition economies is somewhat more favorable regarding the impact
of privatization on bank performance than was the case for non-transition developing countries. The
natural temptation for governments in all the transition economies was to retain effective control of banks
after other non-financial firms had been divested in order to lessen the shock of transition by propping up
borrowers with easy credits. This is exactly what the state overseers did in virtually all cases where they
retained control (or even influence), and the results were invariably disastrous for the banks, the
government and the nation’s taxpayers. After repeated “one-time” re-capitalizations, governments
throughout the region finally ceded control entirely to private owners, who more often than not were
foreign. By 2002, foreign banks controlled the banking system of the largest CEE economies, though
they had not yet had the same impact in FSU countries.
20
6. Lessons Learned from Studies of Bank Privatization—and Unresolved Issues
The body of evidence discussed above allows us to draw conclusions, but also leaves several
issues unresolved. One key item is the fact that many bank privatization programs result in virtually
complete foreign ownership of banking systems, particularly in developing and transition. We begin this
concluding section with a systematic assessment of the evidence regarding the efficacy of foreign
ownership of banking assets.
6.1. Empirical Evidence on the Impact and Efficiency of Foreign Ownership of Banks
It is not too much of an exaggeration to state that the expected final outcome of bank
privatizations—especially flawed privatizations— in developing countries is foreign ownership and
domination of a country’s banking system. Several studies examine the impact of foreign ownership of
banks, and these studies are summarized in Table 7. Claessens, Demirgüç-Kunt and Huizinga (1998)
examine the extent of foreign ownership in 80 national markets over the 1988-1995 period, and test
whether net interest margins, costs, taxes paid, and profitability are different between domestic and
foreign-owned banks. They find that foreign banks achieve higher profits than domestic banks in
developing countries, but exactly the opposite in developed markets. Regression results also suggest that
an increase in foreign bank share leads to lower profitability for domestic banks.
**** Insert Table 7 about here ****
Clarke, Cull and Martinez Peria (2001) use survey data from over 4,000 borrowers in 38
developing and transition countries during 1999 to examine whether foreign bank penetration reduces
access to credit in developing countries. Their empirical results strongly support the assertion that foreign
bank penetration improves firms’ access to credit. Borrowers in countries with high levels of foreign bank
penetration tend to rate interest rates and access to long-term loans as lesser constraints on enterprise
operations and growth than enterprises in countries with foreign penetration. The authors also find that the
benefits of enhanced credit availability apply to small and medium sized businesses as well as large ones.
Majnoni, Shankar and Várheggi (2003) study the dynamics of foreign bank ownership in
Hungary using a sample of 26 commercial banks active in the period 1994 to 2000. By the end of the year
2000, foreign controlled banks accounted for over two-thirds of total banking assets in Hungary. They
find that, after controlling for the nature of investment (greenfield versus acquisition), management style
and duration of ownership, foreign banks are pursuing a lending policy that does not differ significantly
from domestic banks. Foreign banks are, however, able to achieve consistently higher profitability levels.
21
In addition to the empirical studies discussed above, Clarke, Cull Martinez Peria and Sánchez
(2001) survey the extant evidence on foreign bank entry in developing countries, while Berger (2003)
performs a similar survey that also includes developed economies. Clarke, et al. show that foreign
ownership increased substantially in many developing countries between 1994 and 1999, and exceeded 30
percent of all banking assets in Peru, Venezuela, Argentina, the Czech Republic, Poland, Chile and
Hungary in 1999. In sum, the evidence clearly suggests that foreign bank ownership is efficiency
enhancing—at least in developing countries—and may well be the default outcome for many national
bank privatization programs.
6.2. Summary and Conclusions
This preliminary draft does not yet contain a full summary of the lessons that can be drawn from
the empirical record of banking privatization. Instead, the author re-asserts the conclusions presented in
Verbrugge, Megginson and Owens (1999). In that study, we conclude that there are a series of very
important issues and questions that must be addressed in order for bank privatization to be successful.
Some, if not most, of these issues do not come into the equation in non-financial privatizations. For bank
privatization to be successful in any country, a set of conditions must be achieved that ensure the greatest
likelihood for the establishment of a viable banking system. We suggest that the following conditions
represent the minimum conditions for achieving this goal.
• A deposit insurance system must be established that does not create serious moral hazard
problems (for example, 100% deposit insurance is not a wise system).
• A bank regulatory system must be developed that is sufficiently independent from political
influence. This is essential for effective bank examination, supervision and monitoring.
• Governance systems must be instituted where truly independent shareholders control the bank,
have incentives to modernize its systems, and establish policies that orient bank decision-making
toward creating value for shareholders.
• Financial reporting systems must be developed that allow for transparency, especially with regard
to asset quality and true profitability.
• Effective methods of dealing with bad loans prior to and/or during the privatization process are
essential. This problem is especially severe in situations where uncollectable loans are
outstanding to state-owned enterprises (SOEs).
• It is essential to eliminate the culture and propensity of banks to lend to these SOEs after
privatization is critical, especially in economies with large remaining concentrations of SOEs, and
in transition economies
22
• There must be assurances that if the government does retain partial ownership, it acts only as a
passive investor. This is essential to prevent the continuation of past credit-allocation decisions
made by the government, usually on some political or central-planning basis.
• The influence of insider control over bank policies and decisions must be reduced, since these
individuals were likely responsible for past decisions that may have led to the problems. This
may require a complete change in management.
• Finally, and perhaps most controversially, governments may well need to emphasize sales to
foreign owners—particularly foreign commercial banks—in order to attract badly-needed capital,
expertise, technology, and financial legitimacy.
Bank privatizations are among the biggest challenges facing many governments around the
world. The reluctance of states to remove themselves from the banking and credit systems is well
documented. However, if the objective of a country is to establish a more efficient and market-oriented
economy, reducing the influence of the state on credit allocation decisions is critically important.
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Makler, Harry M. 2000. “Bank Transformation and Privatization in Brazil: Financial Federalism and
Some Lessons about Bank Privatization,” Quarterly Review of Economics and Finance 40, pp. 45-69.
Megginson, William L. 2004. The Financial Economics of Privatization, Oxford University Press, New
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Operating Performance of Newly Privatized Firms: An International Empirical Analysis,” Journal of Finance 49, pp. 403-452.
Megginson, William L. and Jeffry M. Netter. 2001. “From State to Market: A Survey of Empirical
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Central Europe and Russia,” Journal of Comparative Economics 25, pp. 5-30.
26
Ness, Walter L., Jr. 2000. “Reducing Government Bank Presence in the Brazilian Financial System,”
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58, pp. 187-214.
27
Table 1: Banking System Details and State Ownership Levels, 1999
Country Percent of total bank assets state owned
Percent of total bank assets
foreign owned
Percent of deposits held by 5
largest banks
Total bank assets / GDP
(percent)
Explicit deposit insurance
scheme Australia 0 17 73 No Bahrain 4 28 71 186 Yes Bangladesh 70 6 65 Yes Canada 0 76 154 Yes Cyprus 3 11 80 76 Yes India 80 0 42 48 Yes Ireland Yes Israel 80 147 No Kenya 62 56 Yes Malaysia 0 18 30 166 No New Zealand 0 99 91 154 No Nigeria 13 0 51 28 Yes Saudi Arabia 0 69 93 No Singapore 0 50 No South Africa 0 5 85 90 No Sri Lanka 55 No Thailand 31 7 75 117 No Trinidad and Tobago 15 8 75 Yes United Kingdom 0 311 Yes United States 0 5 21 66 Yes English origin average 15.94 19.54 65.37 120.86 English origin median 0 8 72 105 Argentina 30 49 48 54 Yes Belgium 74 315 Yes Bolivia 0 42 68 52 No Brazil 52 17 58 55 Yes Chile 12 32 59 97 Yes Egypt 67 4 65 No El Salvador 7 13 75 62 Yes France 0 70 147 Yes Greece 13 5 70 100 Yes Guatemala 8 5 38 28 Yes Honduras 1 2 52 Yes Indonesia 44 7 53 101 Yes Italy 17 5 25 150 Yes Jordan 0 68 68 214 No Kuwait 0 0 109 No Lebanon 0 27 40 Yes Mexico 25 20 80 30 Yes Morocco 24 19 75 89 Yes Netherlands 6 88 358 Yes Oman 0 11 77 64 Yes Panama 12 38 30 386 No Peru 3 40 81 36 Yes Philippines 12 13 46 91 No Portugal 21 12 82 238 Yes Qatar 43 15 76 No Spain 0 11 49 156 Yes Turkey 35 66 50 Yes
28
Venezuela 5 34 64 6 Yes French origin average 16.18 22.2 61.52 127.74 French origin median 12 15 65 97 Austria 4 5 38 Yes Germany 42 4 12 313 Yes Japan 1 6 31 Yes Switzerland 15 9 65 539 Yes Taiwan 43 15 No German origin average 21 6 32.2 426 German origin median 15 5.5 31 426 Denmark 0 79 121 Yes Finland 22 8 97 Yes Iceland 64 0 Yes Sweden 0 2 129 Yes Scandinavian origin average
21.5 3.33 88 125
Scandinavian origin median
11 2 88 125
China 75 No Croatia 37 7 57 Yes Czech Republic 19 26 74 125 Yes Hungary 3 62 Yes Poland 44 26 57 54 Yes Romania 70 8 59 25 Yes Russia 68 9 80 16 No Slovenia 40 5 64 66 No Vietnam 65 No Socialist origin average 40.14 20.43 66.37 57.2 Socialist origin median 40 9 64.5 54 Average with socialist 19.67 18.96 61.64 130.83 Average without socialist
16.96 18.73 60.88 139.80
Median with socialist 12 11 65 98.5 Median without socialist 7 11 66.5 101
Source: Table 1 in James R. Barth, G.Caprio and Ross Levine. 2001. “The Regulation and Supervision of Banks Around the World,” in Robert E. Litan and Richard Herring (Eds.), Integrating Emerging Market Countries Into the Global Financial System, Brookin-Wharton Papers on Financial Services (Brookings Institution Press, 2001), pp. 183-240.
29
Tab
le 2
: Su
mm
ary
of E
mpi
rica
l Stu
dies
on
Stat
e ve
rsus
Pri
vate
Ow
ners
hip
of B
anki
ng
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
---
St
udy
Sam
ple
desc
ript
ion,
stu
dy p
erio
d, a
nd m
etho
dolo
gy
Sum
mar
y of
em
piri
cal f
indi
ngs
and
conc
lusi
ons
Bha
ttach
arya
, L
ovel
l and
Sah
ay
(199
7)
Em
ploy
dat
a en
velo
pe a
naly
sis
to e
xam
ine
the
rela
tive
effi
cien
cy o
f 70
sta
te-,
for
eign
- an
d pr
ivat
ely-
owne
d ba
nks
in I
ndia
dur
ing
the
earl
y st
ages
(19
86-1
991)
of
libe
rali
zati
on.
Find
that
, dur
ing
the
stud
y pe
riod
, pub
licly
-ow
ned
bank
s ar
e th
e m
ost e
ffic
ient
and
pri
vate
ly-o
wne
d ba
nks
the
leas
t eff
icie
nt a
t de
liver
ing
fina
ncia
l ser
vice
s to
cus
tom
ers.
How
ever
, the
y al
so f
ind
that
for
eign
-ow
ned
bank
s in
crea
se m
arke
t sha
re s
igni
fica
ntly
dur
ing
this
per
iod,
pri
mar
ily
at th
e ex
pens
e of
sta
te b
anks
.
LaP
orta
, Lop
ez-
de-S
ilan
es,
Shle
ifer
(20
02)
Usi
ng d
ata
from
92
coun
trie
s, th
ey e
xam
ine
whe
ther
go
vern
men
t ow
ners
hip
of b
anks
impa
cts
the
leve
l of
fina
ncia
l sys
tem
dev
elop
men
t, ra
te o
f ec
onom
ic g
row
th,
and
grow
th r
ate
of p
rodu
ctiv
ity.
The
y te
st w
heth
er
gove
rnm
ent o
wne
rshi
p of
ban
ks is
mot
ivat
ed b
y be
nevo
lent
, “de
velo
pmen
t” o
bjec
tives
or
by r
edis
trib
utiv
e “p
oliti
cal”
obj
ectiv
es
The
y fi
nd th
at g
over
nmen
t ow
ners
hip
is e
xten
sive
, esp
ecia
lly in
the
poor
est c
ount
ries
. The
y al
so f
ind
that
thes
e ho
ldin
gs r
etar
d fi
nanc
ial
syst
em d
evel
opm
ent a
nd r
estr
ict e
cono
mic
gro
wth
rat
es, m
ostl
y du
e to
the
impa
ct o
f st
ate
owne
rshi
p—an
d th
e m
onop
oly
pow
er
freq
uent
ly a
ttend
ant t
here
to--
on p
rodu
ctiv
ity.
Hig
her
gove
rnm
ent
owne
rshi
p in
197
0 is
ass
ocia
ted
wit
h si
gnif
ican
tly
slow
er
subs
eque
nt f
inan
cial
dev
elop
men
t and
low
er g
row
th in
per
cap
ita
inco
me
and
prod
ucti
vity
. Thi
s ev
iden
ce s
uppo
rts
the
polit
ical
vie
w
of s
tate
ow
ners
hip
of b
anks
.
Bon
in, H
asan
an
d Pa
ul W
acht
el
(200
2)
Exa
min
e th
e im
pact
of
owne
rshi
p st
ruct
ure
(sta
te, p
riva
te
and
fore
ign
owne
rshi
p) o
n ba
nk p
erfo
rman
ce in
the
six
tran
sitio
n ec
onom
ies
of B
ulga
ria,
Cro
atia
, the
Cze
ch
Rep
ublic
, Hun
gary
, Pol
and
and
Rom
ania
. The
ir s
ampl
e ha
s 22
2 ob
serv
atio
ns w
ith f
inan
cial
and
ow
ners
hip
data
fr
om th
ese
six
coun
trie
s fo
r th
e ye
ars
1999
and
200
0.
The
aut
hors
fin
d ro
bust
evi
denc
e th
at p
rofi
tabi
lity—
mea
sure
d by
re
turn
on
asse
ts a
nd r
etur
n on
equ
ity-
-is
high
er f
or f
ully
pri
vate
ba
nks
than
for
ban
ks w
ith s
ome
stat
e ow
ners
hip,
and
is th
e hi
ghes
t of
all
for
who
lly f
orei
gn-o
wne
d ba
nks.
For
eign
ban
ks a
lso
expe
rien
ce th
e m
ost r
apid
incr
ease
in c
usto
mer
loan
s.
Bar
th, C
apri
o an
d L
evin
e (2
003)
Use
a n
ew d
atab
ase
on b
ank
regu
lati
on a
nd s
uper
visi
on in
10
7 co
untr
ies
to a
sses
s th
e re
latio
nshi
p be
twee
n sp
ecif
ic
regu
lato
ry a
nd s
uper
viso
ry p
ract
ices
and
ban
king
-sec
tor
deve
lopm
ent,
effi
cien
cy, a
nd f
ragi
lity.
The
y al
so e
xam
ine
the
rela
tions
hip
betw
een
stat
e ow
ners
hip
and
thes
e m
easu
res
of b
anki
ng-s
ecto
r de
velo
pmen
t.
The
y fi
nd th
at g
over
nmen
t ow
ners
hip
of b
anks
is n
egat
ivel
y co
rrel
ated
with
fav
orab
le b
anki
ng o
utco
mes
and
pos
itive
ly li
nked
w
ith
corr
uptio
n. H
owev
er, g
over
nmen
t ow
ners
hip
does
not
ret
ain
an
inde
pend
ent,
robu
st a
ssoc
iati
on w
ith
bank
dev
elop
men
t, ef
fici
ency
or
sta
bilit
y w
hen
othe
r fe
atur
es o
f th
e re
gula
tory
and
sup
ervi
sory
en
viro
nmen
t are
con
trol
led
for.
Sapi
enza
(20
03)
Stud
ies
the
effe
cts
of g
over
nmen
t ow
ners
hip
on b
ank
lend
ing
beha
vior
usi
ng in
form
atio
n on
indi
vidu
al lo
an
cont
ract
s be
twee
n It
alia
n ba
nks
and
cust
omer
s ov
er th
e pe
riod
199
1 to
199
5. H
e em
ploy
s a
mat
ched
set
of
110,
786
com
pany
-ban
k-ye
ar o
bser
vatio
ns o
f lin
es o
f cr
edit
ext
ende
d to
6,9
68 c
ompa
nies
. 55,
393
obse
rvat
ions
Find
s th
at b
orro
wer
s fr
om s
tate
-ow
ned
bank
s pa
y an
ave
rage
of
44 b
asis
po
ints
less
than
do
borr
ower
s fr
om p
riva
te b
anks
. He
also
sho
ws
that
the
votin
g pa
ttern
of
the
regi
on w
here
the
loan
is b
ooke
d an
d th
e pa
rty
of th
e st
ate
bank
’s C
EO
sig
nifi
cant
ly in
flue
nce
the
pric
e of
loan
s. T
hese
res
ults
st
rong
ly s
uppo
rt th
e po
liti
cal v
iew
of
stat
e ba
nk o
wne
rshi
p ov
er th
e co
mpe
ting
soc
ial a
nd a
genc
y co
st v
iew
s.
30
cred
it e
xten
ded
to 6
,968
com
pani
es. 5
5,39
3 ob
serv
atio
ns
refe
r to
bor
row
ers
from
sta
te-o
wne
d ba
nks
and
55,3
93
refe
r to
bor
row
ers
from
pri
vate
ly o
wne
d ba
nks.
Cor
nette
, Guo
, K
haks
ari a
nd
Teh
rani
an (
2003
)
Exa
min
e pe
rfor
man
ce d
iffe
renc
es b
etw
een
priv
atel
y-ow
ned
and
stat
e-ow
ned
bank
s in
six
teen
Far
Eas
t co
untr
ies
from
198
9 th
roug
h 19
98.
The
y fi
nd th
at s
tate
-ow
ned
bank
s ar
e si
gnif
ican
tly le
ss p
rofi
tabl
e th
an p
riva
tely
ow
ned
bank
s du
e to
sta
te b
anks
’ lo
wer
cap
ital r
atio
s,
grea
ter
cred
it ri
sk, l
ower
liqu
idity
and
low
er m
anag
emen
t eff
icie
ncy.
W
hile
the
perf
orm
ance
of
all b
anks
det
erio
rate
d si
gnif
ican
tly a
t the
be
ginn
ing
of th
e A
sian
eco
nom
ic c
risi
s in
199
7 an
d 19
98, s
tate
ba
nks’
per
form
ance
det
erio
rate
d m
ore
than
did
that
of
priv
ate
bank
s an
d pe
rfor
man
ce d
iffe
renc
es a
re m
ost a
cute
in th
ose
coun
trie
s w
here
go
vern
men
t inv
olve
men
t in
the
bank
ing
syst
em is
the
grea
test
.
31
Tab
le 3
: Su
mm
ary
of E
mpi
rica
l Stu
dies
Exa
min
ing
The
Im
port
ance
of
Soft
Bud
get
Con
stra
ints
(SB
Cs)
and
Whe
ther
the
Impo
siti
on o
f H
ard
Bud
get
Con
stra
ints
(HB
C) I
mpr
oves
Cor
pora
te P
erfo
rman
ce
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
---
St
udy
Sam
ple
desc
ript
ion,
stu
dy p
erio
d, a
nd m
etho
dolo
gy
Sum
mar
y of
em
piri
cal f
indi
ngs
and
conc
lusi
ons
Fryd
man
, G
ray,
Hes
sel
and
Rap
aczy
nski
(2
000)
Exa
min
es w
heth
er th
e im
posi
tion
of
hard
bud
get
cons
trai
nts
is a
lone
suf
fici
ent t
o im
prov
e co
rpor
ate
perf
orm
ance
in th
e C
zech
Rep
ublic
, Hun
gary
and
Pol
and.
E
mpl
oys
a sa
mpl
e of
216
fir
ms,
spl
it be
twee
n st
ate-
owne
d (3
1%),
pri
vatiz
ed (
43%
), a
nd p
riva
te (
26%
) fi
rms.
Find
s pr
ivat
izat
ion
alon
e ad
ded
near
ly 1
0 pe
rcen
tage
poi
nts
to th
e re
venu
e gr
owth
of
a fi
rm s
old
to o
utsi
de o
wne
rs. M
ost i
mpo
rtan
t, fi
nds
that
the
thre
at o
f ha
rd b
udge
t con
stra
ints
for
poo
rly
perf
orm
ing
SOE
s fa
lters
, sin
ce g
over
nmen
ts a
re u
nwill
ing
to
allo
w th
ese
firm
s to
fai
l. T
he b
runt
of
SOE
s’ lo
wer
cr
edit
wor
thin
ess
falls
on
stat
e cr
edito
rs. P
riva
tiza
tion
requ
ired
to
impr
ove
perf
orm
ance
; thr
eat o
f H
BC
not
cre
dibl
e.
Ber
tero
and
R
ondi
(20
00)
Em
ploy
ing
a sa
mpl
e of
150
Ita
lian
man
ufac
turi
ng S
OE
S,
wit
h 1,
278
firm
-yea
r ob
serv
atio
ns, e
xam
ine
whe
ther
im
posi
tion
of a
har
d bu
dget
con
stra
int c
an im
prov
e SO
E
perf
orm
ance
. Exp
loit
s th
e fa
ct th
at f
isca
l env
iron
men
t be
cam
e m
uch
tigh
ter
for
Ital
ian
stat
e en
terp
rise
s du
ring
th
e la
te 1
980s
.
Find
that
the
SOE
fir
ms’
res
pons
e to
incr
ease
d de
bt d
urin
g th
e ar
d bu
dget
con
stra
int p
erio
d, 1
988-
93, w
as c
onsi
sten
t with
fin
anci
al
pres
sure
, but
was
not
dur
ing
the
soft
bud
get c
onst
rain
t per
iod
of
1977
-87.
Onl
y du
ring
the
late
r pe
riod
do
firm
s re
spon
d to
fi
nanc
ial p
ress
ure
by in
crea
sing
TFP
and
red
ucin
g em
ploy
men
t. Im
posi
tion
of H
BC
impr
oves
per
form
ance
with
out o
wne
rshi
p ch
ange
. L
izal
and
Sv
ejna
r (2
001)
E
xam
ine
stra
tegi
c re
stru
ctur
ing
and
new
inve
stm
ent
perf
orm
ance
of
4,00
0 C
zech
com
pani
es d
urin
g 19
92-9
8.
Dat
aset
incl
udes
ove
r 83
,000
qua
rter
ly o
bser
vatio
ns.
Dev
elop
and
test
a d
ynam
ic m
odel
of
rest
ruct
urin
g an
d in
vest
men
t, al
low
ing
them
to e
xam
ine
sepa
rabl
e im
pact
of
priv
ate
vers
us p
ublic
and
dom
esti
c ve
rsus
for
eign
ow
ners
hip
on r
estr
uctu
ring
, as
wel
l as
the
impo
rtan
ce o
f ac
cess
to c
redi
t and
a s
oft b
udge
t con
stra
int o
n fi
rm
inve
stm
ent
Find
that
(1)
for
eign
ow
ned
com
pani
es in
vest
the
mos
t and
(d
omes
tica
lly o
wne
d) c
oope
rati
ves
the
leas
t; (2
) pr
ivat
e fi
rms
do
not i
nves
t mor
e th
an s
tate
-ow
ned
firm
s; (
30 c
oope
rati
ves
and
smal
l fir
ms
are
cred
it ra
tione
d; a
nd (
4) S
OE
s op
erat
e un
der
a so
ft
budg
et c
onst
rain
t
Cor
icel
li a
nd
Dja
nkov
(2
001)
Iden
tify
the
pres
ence
of
soft
bud
get c
onst
rain
ts a
nd
anal
yze
thei
r im
pact
on
ente
rpri
se r
estr
uctu
ring
in
Rom
ania
dur
ing
the
initi
al tr
ansi
tion
peri
od. E
mpl
oy a
si
mpl
e an
alyt
ical
mod
el a
nd a
sam
ple
of 4
,429
ent
erpr
ises
w
ith
data
fro
m 1
992-
95 to
test
whe
ther
har
deni
ng b
udge
t co
nstr
aint
s pr
omot
es b
enef
icia
l res
truc
turi
ng a
nd n
ew
inve
stm
ent o
r w
heth
er a
cces
s to
ext
erna
l fin
anci
ng is
Find
that
har
d bu
dget
con
stra
ints
(H
BC
s) d
o pr
omot
e pa
ssiv
e re
stru
ctur
ing,
in th
e fo
rm o
f la
bor
shed
ding
, but
not
new
in
vest
men
t. A
ctiv
e re
stru
ctur
ing
requ
ires
acc
ess
to e
xter
nal
fina
ncin
g. T
ight
ened
ban
k cr
edit
can
indu
ce H
BC
s an
d ra
ise
ente
rpri
se e
ffic
ienc
y in
the
shor
t-ru
n, b
ut a
t the
cos
t of
curt
ailin
g in
vest
men
t.
32
requ
ired
to p
rom
ote
new
inve
stm
ent.
Cul
l, M
ates
ova
and
Shir
ley
(200
2)
Exa
min
e th
e in
cent
ive
that
man
ager
s of
vou
cher
-pr
ivat
ized
Cze
ch c
ompa
nies
hav
e to
“tu
nnel
” (s
trip
ass
ets
out o
f co
mpa
nies
at t
he e
xpen
se o
f ou
tsid
e sh
areh
olde
rs)
and
“loo
t” th
eir
com
pani
es. L
ootin
g oc
curs
whe
n fi
rms
face
a s
oft b
udge
t con
stra
int a
nd m
anag
ers
are
able
to
borr
ow h
eavi
ly, e
xtra
ct f
unds
fro
m th
e fi
rm, a
nd th
en
defa
ult o
n th
e de
bt w
itho
ut p
enal
ty.
Em
ploy
a d
atas
et
wit
h 1,
017
obse
rvat
ions
fro
m 3
92 c
ompa
nies
spr
ead
near
ly e
venl
y be
twee
n 19
94-9
6. H
alf
of th
e fi
rms
wer
e vo
uche
r-pr
ivat
ized
join
t sto
ck c
ompa
nies
(JS
Cs)
whi
le
half
wer
e lim
ited
liab
ility
com
pani
es (
LL
Cs)
.
Con
trol
ling
for
size
, ind
ustr
y, c
apit
al in
tens
ity
and
initi
al le
vera
ge,
find
that
vou
cher
-pri
vati
zed
JSC
s pe
rfor
m s
igni
fica
ntly
wor
se
than
fir
ms
wit
h co
ncen
trat
ed o
wne
rshi
p th
at h
ad to
be
purc
hase
d fo
r ca
sh. I
nves
tmen
t fun
d-co
ntro
lled
JSC
s un
der-
perf
orm
all
oth
er
firm
s, in
clud
ing
othe
r JS
Cs.
Fun
d-co
ntro
lled
JSC
s al
so to
ok o
n li
abili
ties
at a
muc
h fa
ster
rat
e th
an o
ther
fir
ms,
indi
catin
g th
ey
wer
e op
erat
ing
unde
r a
soft
bud
get c
onst
rain
t. T
houg
h no
t abl
e to
m
easu
re d
irec
tly, e
vide
nce
indi
rect
ly s
how
s th
at lo
otin
g w
as a
w
ides
prea
d oc
curr
ence
for
man
y JS
Cs.
33
Table 4: Summary Information on Banking Privatizations, 1980-2003
Panel A: Summary information on banking privatizations in OECD and developing countries, 1980-2000, from Table 1 of Boehmer, Nash and Netter (2003).
Variable
All Countries
OECD Countries
Non-OECD Countries
Number of countries
51
33
18
Number of transactions
270
156
114
Average (median) size per transaction in US$ millions
482.6 (44)
247 (85)
710 (376)
Average (median) percent of enterprise sold in transaction
59.1 (55.0)
46.3 (40.0)
49.6 (41.7)
Percent of transactions through public share offering
37.9
43.6
50.1
Total value of all transactions in US$ millions
1,161,558
38,473
80,897
Panel B: Summary information on banking privatizations, classified by offering type, 1985-2003, from Table 9.4 of Megginson (2004).
Method of sale
Number of transactions
Value (US $ million)
Share issue privatization
144
76,187.85
Asset sale 139 66,714.74
Total 283 142,902.59
34
Tab
le 5
: Su
mm
ary
of E
mpi
rica
l Stu
dies
on
the
Eff
ecti
vene
ss o
f B
ank
Pri
vati
zati
on in
OE
CD
Cou
ntri
es
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
---
St
udy
Sam
ple
desc
ript
ion,
stu
dy p
erio
d, a
nd m
etho
dolo
gy
Sum
mar
y of
em
piri
cal f
indi
ngs
and
conc
lusi
ons
Ver
brug
ge,
Meg
gins
on a
nd
Ow
ens
(199
9)
Stud
y th
e of
feri
ng te
rms
and
shar
e ow
ners
hip
resu
lts f
or
58 u
nsea
sone
d (I
POs)
and
34
seas
oned
off
erin
gs b
y 65
ba
nks
that
wer
e fu
lly
or p
arti
ally
pri
vati
zed
from
198
1 to
19
96. T
hey
then
com
pare
pre
and
pos
t-pr
ivat
izat
ion
perf
orm
ance
cha
nges
for
32
bank
s in
OE
CD
cou
ntri
es a
nd
five
in d
evel
opin
g co
untr
ies.
Doc
umen
t mod
erat
e pe
rfor
man
ce im
prov
emen
ts in
OE
CD
co
untr
ies.
Rat
ios
prox
ying
for
pro
fita
bilit
y, f
ee in
com
e (n
on-
inte
rest
inco
me
as f
ract
ion
of to
tal)
, and
cap
ital a
dequ
acy
incr
ease
si
gnif
ican
tly; l
ever
age
ratio
dec
lines
sig
nifi
cant
ly. D
ocum
ent l
arge
, on
goin
g st
ate
owne
rshi
p, a
nd s
igni
fica
ntly
pos
itive
initi
al r
etur
ns to
IP
O in
vest
ors.
Gle
ason
, M
cNul
ty a
nd
Penn
athu
r (2
003)
Exa
min
e th
e sh
ort a
nd lo
ng-t
erm
sto
ck r
etur
ns to
su
cces
sful
bid
ding
fir
ms
that
par
ticip
ate
in th
e pu
rcha
se o
f a
fina
ncia
l ser
vice
fir
m b
eing
pri
vati
zed.
The
y st
udy
bidd
ers
that
are
US-
base
d or
hav
e st
ock
trad
ed in
a U
S m
arke
t and
exa
min
e 86
tran
sact
ions
fro
m 1
980
thro
ugh
2002
, tho
ugh
mos
t sal
es o
ccur
bet
wee
n 19
95 a
nd 1
998.
Find
that
the
cum
ulat
ive
abno
rmal
ret
urns
(C
AR
s) to
bid
ding
fir
m
shar
ehol
ders
is p
ositi
ve a
roun
d th
e da
te o
f th
e an
noun
cem
ent,
but
that
this
sho
rt-r
un s
uper
ior
perf
orm
ance
is n
ot s
usta
inab
le o
ver
long
er p
erio
ds. W
hile
the
long
-run
CA
Rs
are
(ins
igni
fica
ntly
) ne
gati
ve, t
he a
utho
rs f
ind
that
ban
k bi
dder
s ar
e ab
le to
sig
nifi
cant
ly
redu
ce th
eir
syst
emat
ic r
isks
, rel
ativ
e to
the
hom
e m
arke
t, fo
llow
ing
such
acq
uisi
tions
.
Bra
z (1
999)
E
xam
ines
the
nati
onal
izat
ion
of P
ortu
gal’
s pr
ivat
e ba
nkin
g sy
stem
fol
low
ing
a m
ilit
ary
coup
in 1
974,
as
wel
l as
the
“re-
priv
atiz
atio
n” o
f th
ese
sam
e ba
nks
afte
r 19
90.
He
desc
ribe
s th
e (m
ulti
ple)
obj
ectiv
es o
f th
e Po
rtug
uese
go
vern
men
t in
laun
chin
g th
is b
ank
priv
atiz
atio
n pr
ogra
m,
and
also
dis
cuss
es th
e pr
imar
y m
etho
d of
sal
e (p
ublic
of
fer)
and
off
er te
rms
of th
ese
dive
stit
ures
.
Show
s th
at (
1) th
e pr
oduc
tive
effi
cien
cy o
f pr
ivat
ized
ban
ks
incr
ease
d si
gnif
ican
tly a
fter
div
estit
ure,
wit
h as
sets
per
wor
ker
show
ing
an e
spec
iall
y la
rge
diff
eren
tial
incr
ease
; (2)
pri
vati
zed
bank
s re
duce
d st
aff
at a
sig
nifi
cant
ly m
ore
rapi
d ra
te th
an d
id p
ublic
ba
nks;
and
(3)
pri
vati
zed
bank
s ex
peri
ence
d si
gnif
ican
tly m
ore
rapi
d gr
owth
in th
eir
bran
ch n
etw
orks
than
did
sta
te b
anks
.
Otc
here
and
C
han
(200
3)
Per
form
a c
linic
al a
naly
sis
(cas
e st
udy)
of
the
impa
ct th
at
Com
mon
wea
lth B
ank
of A
ustr
alia
’s (
CB
A’s
) pr
ivat
izat
ion
had
on th
e ba
nk it
self
as
wel
l as
on it
s do
mes
tic
riva
ls. T
he in
itial
sal
e of
CB
A w
as e
xecu
ted
in
1991
, and
the
bank
was
ful
ly d
ives
ted
in 1
996.
Fin
d th
at (
1) th
e st
ock
pric
es o
f m
ajor
riv
al b
anks
rea
cted
neg
ativ
ely
to C
BA
’s s
ales
, with
esp
ecia
lly
nega
tive
reac
tions
to th
e in
itial
and
fi
nal s
ales
; (2)
CB
A’s
long
-run
sto
ck p
rice
per
form
ance
is
sign
ific
antly
pos
itive
, and
incr
ease
s st
eadi
ly a
s th
e go
vern
men
t’s
owne
rshi
p st
ake
decl
ines
; (3)
the
fina
ncia
l and
ope
ratin
g pe
rfor
man
ce o
f C
BA
impr
oves
sig
nifi
cant
ly a
fter
pri
vati
zatio
n, a
nd
surp
asse
s th
at o
f its
maj
or r
ival
s.
35
Tab
le 6
: Su
mm
ary
of E
mpi
rica
l Stu
dies
on
the
Eff
ecti
vene
ss o
f B
ank
Pri
vati
zati
on in
Non
-Tra
nsit
ion
Dev
elop
ing
Cou
ntri
es
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
---
St
udy
Sam
ple
desc
ript
ion,
stu
dy p
erio
d, a
nd m
etho
dolo
gy
Sum
mar
y of
em
piri
cal f
indi
ngs
and
conc
lusi
ons
Bou
bakr
i, C
osse
t, Fi
sche
r an
d G
uedh
ami
(200
3)
Exa
min
e th
e po
st-p
riva
tiza
tion
perf
orm
ance
of
81 b
anks
di
vest
ed in
who
le o
r (m
uch
mor
e fr
eque
ntly
) in
par
t by
gove
rnm
ents
of
22 d
evel
opin
g co
untr
ies
over
the
peri
od
1986
-199
8.
Find
that
(1)
pri
vati
zati
on a
lone
doe
s no
t see
m to
sig
nifi
cant
ly
impa
ct p
rofi
tabi
lity
or o
pera
ting
effi
cien
cy; (
2) o
wne
rshi
p ty
pe a
nd
indu
stry
con
cent
ratio
n si
gnif
ican
tly im
pact
s ri
sk ta
king
beh
avio
r by
pr
ivat
ized
ban
ks, w
ith b
anks
con
trol
led
by in
dust
rial
gro
ups
taki
ng
the
high
est r
isk
expo
sure
, fol
low
ed b
y lo
cally
con
trol
led
bank
s an
d w
ith
fore
ign
owne
d ba
nks
taki
ng th
e le
ast e
xpos
ure;
and
(3)
for
eign
ow
ned
bank
s ha
ve lo
wer
net
inte
rest
mar
gins
than
do
loca
lly o
wne
d ba
nks.
Otc
here
(20
03)
Per
form
s a
sim
ilar
pre
- ve
rsus
pos
t-pr
ivat
izat
ion
anal
ysis
of
ope
rati
ng p
erfo
rman
ce c
hang
es, a
s w
ell a
s an
as
sess
men
t of
stoc
k pr
ice
perf
orm
ance
, for
21
bank
s pr
ivat
izat
ions
(18
uns
easo
ned
and
thre
e se
ason
ed
offe
ring
s) in
low
and
mid
dle
inco
me
coun
trie
s fr
om 1
989
to 1
997.
He
also
com
pute
s th
e sa
me
mea
sure
s fo
r 28
riv
al
firm
s fo
r co
mpa
riso
n pu
rpos
es.
He
find
s th
at p
riva
tiza
tion
anno
unce
men
ts e
licit
sig
nifi
cant
ly
nega
tive
sto
ck p
rice
rea
ctio
ns f
rom
riv
al b
anks
, whi
ch a
re m
ore
nega
tive
the
larg
er th
e st
ate
owne
rshi
p fr
actio
n th
at is
div
este
d.
The
se f
indi
ngs
supp
ort t
he “
com
petit
ive
effe
cts”
hyp
othe
sis
and
sugg
est t
hat i
nves
tors
vie
w p
riva
tizat
ion
anno
unce
men
ts a
s fo
resh
adow
ing
bad
new
s fo
r ri
val b
anks
. He
find
s th
at th
e pr
ivat
ized
ba
nk s
tock
s si
gnif
ican
tly
unde
r-pe
rfor
m th
eir
resp
ectiv
e st
ock
mar
kets
, and
thes
e re
turn
s ar
e al
so (
insi
gnif
ican
tly)
low
er th
an th
ose
achi
eved
by
riva
l ban
k st
ocks
Bec
k, C
ull a
nd
Jero
me
(200
3)
Exa
min
es th
e ef
fect
of
priv
atiz
atio
n on
per
form
ance
usi
ng
an u
nbal
ance
d pa
nel o
f 69
ban
ks w
ith
annu
al d
ata
for
the
peri
od 1
990-
2001
. The
aut
hors
foc
us o
n th
e ni
ne b
anks
th
at w
ere
com
plet
ely
priv
atiz
ed d
urin
g th
is p
erio
d.
Dcu
men
t a s
igni
fica
ntly
pos
itive
impa
ct f
rom
pri
vatiz
atio
n, e
ven
in
a m
acro
econ
omic
and
reg
ulat
ory
envi
ronm
ent t
hat w
as in
hosp
itabl
e to
fin
anci
al in
term
edia
tion
. Pri
vatiz
atio
n he
lped
clo
se th
e ve
ry w
ide
gap
betw
een
the
perf
orm
ance
of
stat
e-ow
ned
bank
s an
d pr
ivat
e ba
nks
in N
iger
ia, t
houg
h th
e pe
rfor
man
ce o
f di
vest
ed f
irm
s ne
ver
surp
asse
d th
at o
f pr
ivat
e ba
nks.
36
Tab
le 7
: Su
mm
ary
of E
mpi
rica
l Stu
dies
on
the
Eco
nom
ic I
mpa
ct o
f F
orei
gn B
ank
Ow
ners
hip
in D
evel
opin
g C
ount
ries
--
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
----
-
Stud
y Sa
mpl
e de
scri
ptio
n, s
tudy
per
iod,
and
met
hodo
logy
Su
mm
ary
of e
mpi
rica
l fin
ding
s an
d co
nclu
sion
s
Cla
esse
ns,
Dem
irgü
ç-K
unt
and
Hui
zing
a (1
998)
Exa
min
e th
e ex
tent
of
fore
ign
owne
rshi
p in
80
nati
onal
m
arke
ts o
ver
the
1988
-199
5 pe
riod
, and
test
whe
ther
net
in
tere
st m
argi
ns, c
osts
, tax
es p
aid,
and
pro
fita
bilit
y ar
e di
ffer
ent b
etw
een
dom
estic
and
for
eign
-ow
ned
bank
s.
Find
that
for
eign
ban
ks a
chie
ve h
ighe
r pr
ofits
than
dom
esti
c ba
nks
in d
evel
opin
g co
untr
ies,
but
exa
ctly
the
oppo
site
in d
evel
oped
m
arke
ts. R
egre
ssio
n re
sults
als
o su
gges
t tha
t an
incr
ease
in f
orei
gn
bank
sha
re le
ads
to lo
wer
pro
fita
bilit
y fo
r do
mes
tic
bank
s.
Cla
rke,
Cul
l and
M
arti
nez
Per
ia
(200
1)
Use
sur
vey
data
fro
m o
ver
4,00
0 bo
rrow
ers
in 3
8 de
velo
ping
and
tran
sitio
n co
untr
ies
duri
ng 1
999
to
exam
ine
whe
ther
for
eign
ban
k pe
netr
atio
n re
duce
s ac
cess
to
cre
dit i
n de
velo
ping
cou
ntri
es.
The
ir e
mpi
rica
l res
ults
str
ongl
y su
ppor
t the
ass
erti
on th
at f
orei
gn
bank
pen
etra
tion
impr
oves
fir
ms’
acc
ess
to c
redi
t. B
orro
wer
s in
co
untr
ies
with
hig
h le
vels
of
fore
ign
bank
pen
etra
tion
tend
to r
ate
inte
rest
rat
es a
nd a
cces
s to
long
-ter
m lo
ans
as le
sser
con
stra
ints
on
ente
rpri
se o
pera
tion
s an
d gr
owth
than
ent
erpr
ises
in c
ount
ries
with
fo
reig
n pe
netr
atio
n. T
he a
utho
rs a
lso
find
that
the
bene
fits
of
enha
nced
cre
dit a
vaila
bilit
y ap
ply
to s
mal
l and
med
ium
siz
ed
busi
ness
es a
s w
ell a
s la
rge
ones
.
Maj
noni
, Sh
anka
r an
d V
árhe
ggi (
2003
)
Stud
y th
e dy
nam
ics
of f
orei
gn b
ank
owne
rshi
p in
H
unga
ry u
sing
a s
ampl
e of
26
com
mer
cial
ban
ks a
ctiv
e in
th
e pe
riod
199
4 to
200
0. B
y th
e en
d of
the
year
200
0,
fore
ign
cont
rolle
d ba
nks
acco
unte
d fo
r ov
er tw
o-th
irds
of
tota
l ban
king
ass
ets
in H
unga
ry.
Find
that
, aft
er c
ontr
olli
ng f
or th
e na
ture
of
inve
stm
ent (
gree
nfie
ld
vers
us a
cqui
siti
on),
man
agem
ent s
tyle
and
dur
atio
n of
ow
ners
hip,
fo
reig
n ba
nks
are
purs
uing
a le
ndin
g po
licy
that
doe
s no
t dif
fer
sign
ific
antly
fro
m d
omes
tic
bank
s. F
orei
gn b
anks
are
, how
ever
, abl
e to
ach
ieve
con
sist
ently
hig
her
prof
itabi
lity
leve
ls.
37
Appendix 1: Details of Banking Privatization This table presents key information about banking privatizations executed by governments around the world. Most of the data presented here is from the Financial Times and/or the FT.COM website, but other sources are employed as well. In particular, sales marked with an asterisk are taken from various issues of Privatisation International (1998-2000) and Privatisation International Yearbooks (1998-2001). The method of sale refers to whether the company was divested via a share issue privatization (SIP) or asset sale. Source: Table 9.4 in William L. Megginson, The Financial Economics of Privatization (Oxford University Press, New York, 2004).
Country Company Date Amount of offer (US $ million)
Method of sale
Fraction sold
Argentina Banco de Santa Fe * May 98 $ 57.3 Asset sale 90% Argentina Banco Hipotecario * Jan 99 $ 496.5 SIP 46% Australia Commonwealth Bank Jul 91 $ 1,017 SIP 29.75% Australia Commonwealth Bank Oct 93 $ 878 SIP 19.90% Australia State Bank of New South Wales * Sep 94 $ 426.75 Asset sale 1 --- Australia Bank of Western Australia (Bank West) * Dec 95 $ 672 Asset sale 2 --- Australia Bank of South Australia (Bank SA) 1995 $ 525 Asset sale --- Australia Bank West * 1996 $ 325 SIP --- Australia Commonwealth Bank Jul 96 $ 3,100 SIP 50.4% Australia Bank of Queensland * Nov 99 $ 86.7 SIP 39.6% Australia Trust Bank * Dec 99 $ 96.2 Asset sale 100% Austria Salzburger Sparkasse * Oct 95 $ 188 Asset sale 70% Austria Hypo Niederoesterreichische * Jun 96 --- Asset sale 26% Austria Oberoesterreiche Hypo Nov 96 $ 158.9 Asset sale 49% Austria Creditanstalt Jan 97 $ 1,586 Asset sale 70% 3 Austria Bank Austria Feb 98 $ 389 Asset sale 9.6% 4 Austria Salzburger Landes-Hypothekenbank Oct 98 --- Asset sale 50.01% Belgium Credit Agricole / Landbouw Krediet * 1995 $ 55 Asset sale --- Belgium Credit Communal de Belgigue Nov 96 $ 1,100 SIP 34.5% Belgium Credit Agricole / Landbouw Krediet * 1996 $ 33 Asset sale --- Belgium ASLK-CGER * Dec 98 $ 1,500 Asset sale 25.1% Brazil Banco Meridional 1997 $ 241.5 Asset sale --- Brazil Bemge * Sep 98 $ 494 Asset sale --- Brazil Bandepe * Nov 98 $ 154 Asset sale 99.97% Brazil Baneb * Jun 99 $ 144.8 Asset sale 94% Brazil Banestado Oct 00 $ 871 Asset sale 88% 5 Brazil Banespa Nov 00 $ 3,600 Asset sale 76% 6 Bulgaria United Bulgarian Bank Jul 97 $ 30 Asset sale 65% 7 Bulgaria Post Bank * Aug 98 $ 38 Asset sale 78.23% Bulgaria Express Bank * Sep 99 $ 39.5 Asset sale 67%
1 Stake sold by New South Wales state government to Colonial Mutual, a Melbourne-based insurance group. Colonial
Mutual also promised to make a $ 259 million capital injection at the end of four years and not to sell the firm to any of Australia’s Big Four banks.
2 Stake sold by Western Australian state government to Bank of Scotland. 3 In a highly politicized sale, the state’s controlling stake was sold to Creditanstalt’s main rival, Bank Austria. 4 State’s remaining stake in Bank Austria sold to Dresdner Bank of Germany. 5 Stake sold to Banco Italu. 6 Stake sold to Spain’s Banco Santander Central Hispano. 7 Purchase paid for through a $ 30 million rights issue after the sale. Stake sold to Oppenheimer (US) and the European
bank for Reconstruction and Development.
38
Bulgaria Bulbank Jul 00 $ 345 Asset sale 98% 8 Bulgaria DSK Bank Apr 03 $ 336 Asset sale 100% 9 China Bank of Shanghai 2001 $ 62 Asset sale 8% 10 China Bank of China Jul 02 $ 2,800 SIP --- China Pudong Development Bank Dec 02 $ 67 Asset sale 5% 11 Colombia Banco Corpavi 1994 $ 170 SIP 34.2% Colombia Banco Ganadero 1996 $ 328 Asset sale 40% Colombia Banco Popular 1996 $ 271 Asset sale 80% Cote d’Ivoire SGBCI Jun 99 $ 5.75 SIP --- Croatia Zagrebacka Bank Jun 96 $ 25 SIP --- Czech Republic Komercni Bank Jul 95 $ 85 SIP 4% Czech Republic Komercni Bank May 96 $ 50 SIP 3.2% Czech Republic Investicni a Postovni Banka (IPB) * Jan 98 $ 81.8 Asset sale 36% Czech Republic Ceskoslovenska Obchodni Banka (CSOB) Jun 99 $ 1,175 Asset sale 69.99% 12 Czech Republic Komercni Bank Jun 01 $ 1,210 Asset sale 60% 13 Denmark Girobank * 1993 $ 110 SIP 51% Egypt Commercial International Bank * 1993 $ 115 SIP 26.25% Egypt Commercial International Bank * 1996 $ 119 SIP --- Egypt Egyptian American Bank * 1996 $ 35 SIP --- Egypt Misra International Bank * 1996 $ 34 SIP --- Egypt Alexandria Commercial & Maritime Bank * 1997 $ 26.6 SIP --- Egypt Cairo Barclays Bank * Jan 99 $ 4 Asset sale 11% Finland Skopbank Loan Portfolio * 1995 $ 134 Asset sale --- France Banque Paribas Jan 87 $ 2,740 SIP 100% France Banque de Batements de Travaux Publics Apr 87 $ 67 SIP 100% France Banque Industrialle & Mobiliere Privee
(BIMP) Apr 87 $ 60 SIP 100%
France Credit Commercial de France Apr 87 $ 732 SIP 100% France Credit Local de France Nov 91 $ 340 SIP 22% France Credit Local de France Jun 93 $ 738 SIP 30.5% France Banque Nationale de Paris Oct 93 $ 4,920 SIP 60% France Banque Francaise du Commerce Exterieur * 1995 $ 500 Asset sale --- France CIC Apr 98 $ 2,200 Asset sale 67% 14 France Societe Marseillais de Credit * Oct 98 $ 1,795 Asset sale 100% France Credit Lyonnais Jul 99 $ 6,960 SIP 90% France Credit Foncier de France (CFF) Jul 99 $ 700 Asset sale 90.6% France Banque Hervet Feb 01 $ 413 Asset sale 90% 15 France Credit Agricole Dec 01 $ 3,158 SIP --- France Credit Lyonnais Nov 02 $ 2,200 Asset sale 10.9% 16 Germany Deutsche Verkehrs–Kredit–Bank (DVKB) Mar 88 $ 34 SIP 24.9% Germany Deutsche Siedlungs-Und Landesrentenbank
(DSL) Oct 89 $ 241 SIP 48%
Germany Deutsche Kreditbank (DKB) 1995 $ 3,234 Asset sale --- Ghana Ghana Commercial Bank * 1996 $ 26 Asset sale ---
8 Stake sold to a consortium of Italy’s UniCredito and Germany’s Allianz. 9 Stake sold to Hungary’s OTP Bank. 10 Stake sold to HSBC. 11 Stake sold Citigroup. 12 Stake sold to Belgium’s KBC. 13 Stake sod to France’s Societe Generale. 14 Sake sold to France’s Credit Mutuel. 15 Stake sold to CCF, which had recently been acquired by Britain’s HSBC. 16 Stake sold to BNP Paribas.
39
Ghana Ghana Commercial Bank * 1996 $ 35 SIP --- Ghana Social Security Bank * 1997 $ 16.6 Asset sale --- Greece Bank of Athens * 1993 $ 28 Asset sale 66.67% Greece General Hellenic Bank Apr 98 $ 67 SIP 50% Greece National Bank of Greece May 98 $ 379 SIP 10% Greece Cretabank Jul 98 $ 304 Asset sale 17 --- Greece Bank of Central Greece Aug 98 $ 59 Asset sale 56% Greece National Bank of Greece Apr 99 $ 553 SIP 4% Greece National Bank of Greece Oct 99 $ 348 SIP 2.9% Greece Ionian Bank 1999 $ 623 Asset sale 51% Greece Commercial Bank of Greece Jun 00 $ 283 Asset sale 6.7% 18 Guyana National Bank of Industry Oct 97 $ 20 Asset sale 47.5% 19 Hungary Magyar Kulkereskedelmi Bank Jul 94 $ 92 Asset sale 42% Hungary Budapest Bank 1995 $ 87 Asset sale --- Hungary National Savings & Commercial Bank (OTP) 1995 $ 89 SIP 30% Hungary Magyar Hitel Bank * 1996 $ 89 Asset sale --- Hungary OTP Bank Oct 97 $ 213 Asset sale 25% Hungary OTP Bank Oct 97 $ 140 SIP 16.4% Hungary Kereskedelmi es Hitelbank (K&H Bank) 1997 $ 30 Asset sale --- Hungary Mezobank 1997 $ 25 Asset sale --- Hungary Penzintezeti Kozpont Bank (PK Bank) 1997 $ 18.9 Asset sale --- Hungary OTP Bank Nov 99 $ 162 SIP 14.1% Iceland National Bank of Iceland * Sep 98 $ 24.5 SIP 15.75% Iceland Iceland Investment Bank (FBA) * Nov 98 $ 67 SIP 49% Iceland Bunadarbanki * Dec 98 $ 10 SIP 8.5% Iceland Iceland Investment Bank Nov 99 $ 136.5 Asset sale 51% Iceland National Bank of Iceland Oct 02 $ 138 Asset sale 45.8% 20 India State Bank of India Dec 93 $ 713 SIP 29.4% India Industrial Development Bank of India 1995 $ 758 SIP --- India State Bank of India Oct 96 $ 370 SIP --- India Bank of Baroda 1997 $ 235 SIP --- India Bank of India 1997 $ 186 SIP --- India Corporation Bank 1997 $ 84 SIP --- India Dena Bank 1997 $ 50 SIP --- Indonesia Bank Negara Indonesia Nov 96 $ 400 SIP 25% Indonesia Bank Central Asia Mar 02 $ 539 Asset sale 51% 21 Israel IDB Holding 1992 $ 350 Asset sale 42.5% Israel Israel Union Bank May 93 $ 85.5 Asset sale 60% Israel Bank Hapoalim May 93 $ 120 SIP 6.9% Israel Bank Leumi * Aug 93 $ 272 SIP 14.8% Israel Bank Hapoalim * Nov 93 $ 122 SIP 6.4% Israel Bank Mizrahi Nov 94 $ 110 Asset sale 26% 22 Israel Bank Mizrahi * 1995 $ 110 Asset sale --- Israel Israel Discount Bank Mar 96 $ 80 SIP 16% Israel Israel Discount Bank * Apr 97 $ 180 SIP 19.1%
17 Sold to Latsis Oil and shipping group for an unexpectedly high price. 18 Stake sold to France’s Credit Agricole. 19 Stake sold to Republic Bank of Trinidad and Tobago. 20 Stake sold to Samson, Iceland’s second largest bank, leaving the government with a 2.5% holding – which it plans to
retain. 21 State residual holding sold to Farallon Capital, a US based investment group. 22 Stake sold to the Ofer-Wertheim consortium, which also acquired an option to purchase an additional 25% within 18
months.
40
Israel Bank Leumi * May 97 $ 406 SIP 18.4% Israel Bank Mizrahi * Jul 97 $ 129 SIP 25% Israel Bank Hapoalim Sep 97 $ 1,370 Asset sale 43% 23 Israel Bank Hapoalim * Feb 98 $ 168 SIP 7.5% Israel Bank Leumi Apr 98 $ 52 SIP 2% Israel Bank Mizrahi Jun 98 $ 200 SIP 31.7% Israel Bank Leumi Sep 98 $ 160 SIP 7.5% Israel Bank Hapoalim * Apr 99 $ 59 SIP 2% Israel Bank Hapoalim Jul 99 $ 160 SIP 4% Israel Bank Hapoalim Jun 00 $ 582 SIP 17% Italy Banca Commerciale Italiana Aug 85 $ 118 SIP 12% Italy Banco di Napoli Nov 91 $ 323 SIP 9.7% Italy Credito Italiano Nov 91 $ 140 SIP 7% Italy Istituto Bancario San Paolo Mar 92 $ 709 SIP 20% Italy Credito Italiano Dec 93 $ 1,079 SIP 58% Italy Credito Italiano Dec 93 $ 100 SIP --- Italy Istituto Mobiliare Italiano Jan 94 $ 1,513 SIP 30% Italy Banca Commerciale Italiana Feb 94 $ 1,700 SIP 54% Italy Istituto Mobiliare Italiano Jul 95 $ 733 Asset sale 3.5% 24 Italy Istituto Mobiliare Italiano Jul 96 $ 327 SIP 6.93% Italy Istituto San Paolo di Torino May 97 $ 730 SIP 46% Italy Banca di Roma Nov 97 $ 1,740 SIP 36.5% Italy Banco di Napoli 1997 $ 39 Asset sale --- Italy Cariplo Bank 1997 $ 5,000 Asset sale --- Italy Banca Nazionale del Lavoro Nov 98 $ 4,600 SIP 85% Italy Banca Monte dei Paschi di Siena Jun 99 $ 2,302 SIP 27% Italy Mediocredito Centrale Nov 99 $ 2,148 Asset sale 100% Italy Banca Regionale Europea Dec 99 $ 1,421 Asset sale 56.73% Jamaica NCB Group Nov 86 $ 16 SIP 100% Japan Nippon Credit Bank Jun 00 $ 932 Asset sale 80% 25 Kazakhstan Turanalem Bank * Mar 98 $ 100 Asset sale 72% Kenya National Bank of Kenya Nov 94 $ 10 SIP 20% Kenya Kenya Commercial Bank * 1996 $ 11 SIP --- Kenya Kenya Commercial Bank May 98 $ 29.4 SIP 25% Korea Citizens National Bank Aug 94 $ 264 SIP 10% Korea Seoul Bank Mar 99 $ 700 Asset sale 70% Korea Woori Financial Group Jun 02 $ 509 SIP 12% Korea Seoul Bank Sep 02 $ 965 Asset sale --- Korea Chohung Bank Jun 03 $ 2,530 Asset sale 80% 26 Kuwait Kuwait Real Estate Bank * 1996 $ 42 Asset sale --- Kuwait Burgan Bank * 1997 $ 158 Asset sale --- Kuwait Burgan Bank * 1997 $ 270.6 SIP --- Kuwait Commercial Bank of Kuwait * 1997 $ 32.7 Asset sale --- Kuwait Gulf Bank * 1997 $ 56 Asset sale --- Kuwait Gulf Bank * 1997 $ 57 Asset sale --- Latvia Latvijas Unibanka May 96 $ 10 Asset sale 23% 27 Lithuania Lithuanian Agricultural Bank Mar 02 $ 20 Asset sale 76.01% 28
23 State’s remaining stake sold to a group of investors led by Ted Arison, a well known US-Israeli billionaire. 24 Private placement of shares to Istituto Bancario San Paolo di Torino. 25 After being nationalized by the Japanese government in 1998, Nippon Credit bank was sold to a group led by Softbank. 26 After nationalizing much of the Korean banking system after the Asian financial crisis of 1997, and then injecting $
132.5 billion into bailing out these banks, the government’s stake in Chohung was sold to Shinhan Financial Group. 27 Stake sold to the European Bank fro Reconstruction and Development.
41
Macedonia Stopanska Banka Sep 97 $ 17.6 Asset sale 55% 29 Malta Mid-Med Bank * Apr 99 $ 250 Asset sale 67.1% Mexico Grupo Financiero Bancomer * Oct 91 $ 2,798 Asset sale 56% Mexico Banco Nacional de Mexico (Banamex) * Aug 91 $ 4,430 Asset sale 70.7% Mexico Grupo Financiero Bancomer Mar 92 $ 837 SIP --- Mexico Grupo Financiero Serfin Dec 93 $ 420 SIP --- Mexico BBVA Bancomer Jan 02 $ 865 Asset sale 11.6% 30 Mongolia Trade and Development Bank May 02 $ 12.23 Asset sale 76% 31 Morocco Banque Marocaine du Commerce Exterieur Jan 95 $ 169 SIP 50% Morocco Credit-Eqdom Jun 95 $ 9 SIP 18% Morocco Banque Marocaine du Commerce Exterieur Apr 96 $ 50 SIP --- Morocco Banque Marocaine du Commerce Exterieur * 1997 $ 80 Asset sale --- Morocco Banque Marocaine du Commerce Exterieur * 1997 $ 64 SIP --- Mozambique Commercial Bank of Mozambique * 1996 $ 11 Asset sale --- Mozambique Banco Populaire de Desenvolvimento * 1997 $ 21 Asset sale --- Norway Christiania Bank Dec 93 $ 259 SIP 22% Norway Christiania Bank Nov 95 $ 150 SIP 17% Norway Fokus Bank 1995 $ 291 SIP 96% Norway Den Norske Bank 1996 $ 376 SIP 19.8% Norway Union Bank of Norway * 1996 $ 275 SIP --- Norway Christiania Bank * Mar 99 $ 348 SIP 16% Norway Christiania Bank Oct 00 $ 2,900 Asset sale 35% 32 Pakistan Habib Credit ad Exchange Bank Jun 97 $ 39 Asset sale 70% 33 Pakistan First Women Bank * 1997 $ 6.5 Asset sale --- Pakistan Schon Bank * 1997 $ 11.2 Asset sale --- Pakistan United Bank Limited Oct 02 $ 208 Asset sale 51% 34 Peru Banco Popular * 1993 $ 6 Asset sale 100% Peru Interbanc * Jul 94 $ 51 Asset sale 100% Peru Banco Continental * Apr 95 $ 256 Asset sale 60% Peru Banco Continental Jul 98 $ 68 SIP 20% Philippines Philippine National Bank Mar 92 $ 89 SIP 10% Philippines International Corporate Bank * 1993 $ 114 Asset sale 93.7% Philippines Philippine National Bank 1995 $ 71 SIP 8% Philippines Philippine National Bank * Dec 99 $ 230 Asset sale 35% Philippines Philippine National Bank Jul 00 $ 141 Asset sale 30% 35 Poland Bank Slaski Jan 94 $ 64 SIP 30% Poland Bank Premyslowo Handlowy Jan 95 $ 150 SIP 50.1% Poland Bank Gdanski Dec 95 $ 67 SIP --- Poland Polish Development Bank * 1995 $ 17 SIP --- Poland Bank Slaski Jun 96 $ 196 Asset sale 7.25% 36
28 Stake sold, after five years of trying, to the Germany’s Norddeutsche Landesbank Girozentrale. 29 Stake sold to group including Austria’s Giro Bank, the European Bank for Reconstruction and Development and the
International Finance Corporation. 30 The Mexican government sold its remaining stake in the former Bancomer to Spain’s Banco Bilbao Vizcaya Argentaria,
which already had a 48.5 percent stake in the bank. 31 Stake sold to Banca Commerciale Lugano/Gerald Metals, a Swiss –US consortium. 32 The government’s residual stake sold to Nordic Bank Holding. 33 Stake sold to the UAE’s Sheikh Nahayan bin Mubarak Al Nahyan. The state planned to retain its 20% stake
indefinitely. 34 Stake sold to a group of investors from Abu Dhabi and Bestway Holdings, a company representing expatriate
Pakistanis. The state plans to retain the remaining 49% stake. 35 State’s remaining stake sold Lucio Tan, a Philippine businessman and friend of President Joseph Estrada. 36 ING, the Dutch financial services group, raised its stake to 33.15 percent.
42
Poland Petrobank * 1996 $ 48 Asset sale --- Poland Wielkopolski Bank Kredytowy * 1996 $ 60 Asset sale --- Poland Bank Gdanski Feb 97 $ 83.4 Asset sale 32% 37 Poland Powszechny Bank Kredytowy 1997 $ 300.2 SIP 65% Poland Polish Investment Bank Apr 97 $ 67 Asset sale 100% 38 Poland Bank Premyslowo Handlowy Jun 97 $ 660 SIP --- Poland Export Development Bank Sep 97 $ 94.5 Asset sale 15.9% 39 Poland Powszechny Bank Kredytowy Sep 97 $ 264 SIP 65% Poland Polish Development Bank May 98 $ 52.8 Asset sale 44.54% Poland Bank Pekao * Jun 98 $ 260 SIP 15% Poland PKBL * Oct 98 $ 51.9 Asset sale 99.93% Poland BPH * Nov 98 $ 600.6 Asset sale 36.7% Poland Bank Pekao * Jun 99 $ 1,090 Asset sale 52.09% Poland Bank Zachodni * Jun 99 $ 580 Asset sale 80% Poland Powszechny Bank Kredytowy Jun 00 $ 76.06 Asset sale 10.3% 40 Poland Bank Pekao Oct 00 $ 133 SIP --- Portugal Banco Totta and Acores Jul 89 $ 195 SIP --- Portugal Banco Totta and Acores Jul 90 $ 153 SIP 31% Portugal Banco Portugues do Atlantico Dec 90 $ 382 SIP 33% Portugal Sociedad Financeria Portuuesa May 91 $ 109 SIP 7.5% Portugal Banco Espirito Santo e Comercial de Lisbon
(BESCL) Jul 91 $ 385 SIP 40%
Portugal Banco Fonsecas & Burnay Aug 91 $ 247 SIP 80% Portugal BESCL Feb 92 $ 590 SIP 60% Portugal Banco Portugues do Atlantico May 92 $ 346 SIP 17.64% Portugal Banco Fonsecas & Burnay Jul 92 $ 61 SIP 20% Portugal Credito Predial Portugues Dec 92 $ 279 SIP 100% Portugal União de Bancos Portugues Dec 92 $ 167 SIP 61.2% Portugal Banco Portugues do Atlantico Jul 93 $ 221 SIP 17.5% Portugal Banco Portugues do Atlantico Mar 94 $ 105 SIP 7.5% Portugal Banco Pinto & Sotto Mayor Nov 94 $ 255 SIP 80% Portugal Banco Fomento Exteroir Dec 94 $ 133 SIP 80% Portugal Banco Pinto & Sotto Mayor Mar 95 $ 46 SIP 20% Portugal Banco Fomento Exteroir * 1996 $ 892 Asset sale --- Portugal Banco Totta e Acores 1996 $ 135 SIP --- Portugal Banco Fomento Exteroir * 1997 $ 35.9 SIP 3.5% Romania Banca Romana pentru Dezvoltare Dec 98 $ 200 Asset sale 41% Romania Banc Post Apr 99 $ 42.8 Asset sale 42% Romania Banca Agriola Apr 01 $ 52 Asset sale 98% 41 Russia Vneshtorgbank Dec 02 $ 300 Asset sale 20% 42 Singapore Keppel Bank 1993 $ 235 SIP --- Slovakia Slovenska Sporitelna Dec 00 $ 347 Asset sale 87% 43 Slovakia Vseobecna Uverova bank (VUB) Jun 01 $ 473 Asset sale 94.5% 44
37 Stake sold to the Polish bank IG, giving the bank a 63% holding. 38 Stake sold to Poland’s Kredyt Bank. 39 Commerzbank, which already owned a 32.8 percent stake, increased its holding to 48.7 percent through a $ 94.5 million
share offering reserved for it alone. Italy’s BCI also acquired a 5 percent stake at the same time for an undisclosed price. 40 Bank of Austria increased its stake in PKB to 57 percent with this sale. 41 Stake sold to a consortium including Raiffeisen Zentralbank, the Austrian bank, the Austrian bank, and the Romanian-
American Enterprise Fund. 42 Stake sold to European Bank for Reconstruction and Development, leaving the Russian government with a 79.9
percent holding. 43 Stake sold to Austria’s Erste Bank.
43
Slovenia Nova Ljubljanska Banka (NLB) 2002 $ 427.7 Asset sale 34% 45 Spain Argentaria May 93 $ 1,027 SIP 24.9% Spain Argentaria Nov 93 $ 1,214 SIP 25% Spain Argentaria Mar 96 $ 1,200 SIP 25% Spain Argentaria Feb 98 $ 2,300 SIP 25% Sri Lanka National Development Bank of Sri Lanka * 1997 $ 75 SIP --- Sweden Nordbanken Oct 95 $ 893 SIP 30% Sweden Nordbanken 1997 $ 907.3 SIP --- Taiwan Chiao-Tung Bank * 1996 $ 219 SIP --- Taiwan Chiao-Tung Bank * Aug 97 $ 982.7 Asset sale --- Taiwan Chang Hwa Commercial bank * Dec 97 $ 381.7 SIP --- Taiwan Taiwan Business Bank * Jan 98 $ 554 SIP --- Taiwan First Commercial Bank * Jan 98 $ 1,372 SIP --- Taiwan HuaNan Commercial Bank * Jan 98 $ 798 SIP --- Taiwan Farmers’ Bank of China * Sep 99 $ 143 SIP --- Taiwan Chiao-Tung Bank * Sep 99 $ 363 SIP --- Taiwan Bank of Kaohsiung * Sep 99 $ 25 SIP --- Thailand Nakomthon Bank Sep 99 $ 317 Asset sale 75% Thailand Radanasin Bank Nov 99 $ 166 Asset sale 75.02% Thailand Bank Thai Oct 02 $ 130 SIP 36.2% 46 Turkey Sekerbank 1993 $ 4 Asset sale 10% Turkey Sumerbank Sep 95 $ 103.5 Asset sale --- Turkey Denizbank May 97 $ 66 Asset sale --- Turkey Anadolubank * May 97 $ 69.5 Asset sale --- Turkey Etibank Jan 98 $ 155.5 Asset sale 100% Turkey Turkiye is Bankasi (Isbank) May 98 $ 651 SIP 12.3% Uganda Uganda Commercial Bank 1997 $ 5 Asset sale --- Uganda Barclays Bank Oct 98 $ 3.8 Asset sale 100% Venezuela Banco Popular 1993 $ 23 Asset sale --- Venezuela Banco de Fomento de Coro 1994 $ 4 Asset sale --- Venezuela Banco Guyana 1995 $ 7 Asset sale --- Venezuela Banco Consolidado 1996 $ 124 Asset sale --- Venezuela Banco de Venezuela Dec 96 $ 338 Asset sale 90% Venezuela Banco Republica Jun 97 $ 56.7 Asset sale 56.7% Venezuela Banco Populary de los Andes Dec 97 $ 47.4 Asset sale 47.25% Venezuela La Confederacion del Canada Venezolana Aug 98 $ 6.4 Asset sale --- Zimbabwe Comercial Bank of Zimbabwe Sep 97 $ 43.7 SIP 80% Total $ 142,902.59
44 Stake sold to Italy’s Banca Intesa. 45 Stake sold to Belgium’s KBC. 46 This offering was only partially successful, with only 77% of the offer subscribed. The government’s stake was thus
reduced only from 96% to 59.8%, rather than to 49% as planned. Additionally, shares of Bank Thai fell sharply soon after the offer, yielding a 3% loss to investors who bought shares at the purchase price – despite the fact that shares were sold at a 9% discount to the previous market price.
44
Table Summary
Method of sale Number of transactions
SIP 144 Asset sale 139 Total 283
Method of sale Value (US $ million)
SIP 76,187.85 Asset sale 66,714.74 Total 142,902.59
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