Policy Responses from Four Economies
Edited by Daigee Shaw and Bih Jane Liu
Chapter 3: De-Privatization? Case Studies of Government Banks’ Performance in Developing Countries During the Financial Crisis
Chung-Hua Shen and Chih-Yung Lin 3.1 INTRODUCTION The financial crisis of 2008–09 raises the issue of the performance of government-owned banks (GOBs). Because most of the privately-owned banks (POBs) were hit severely by the crisis, governments started injecting funds to rescue them and thus nationalizing them. This de-privatizing action seems to go against the privatization tide that has run since the 1980s. Because of this nationalization process, researchers are wondering whether this de-privatizing process implies that GOBs perform better than privately owned banks. This issue is interesting because empirical studies argue typically that private banks perform better regardless of profitability measures, regions and sample periods. For simplicity, the underperformance of governmentowned banks is termed ‘the GOB effect’. For example, Mian (2003), using 250 GOBs from 71 emerging economies, found that government banks uniformly underperform private banks. Iannotta et al. (2007), using an enlarged sample, found that government banks have lower profitability and loan quality, and a higher insolvency risk, than private banks. Furthermore, Cornett et al. (2008) found that government banks are significantly less profitable than private banks. Micco et al. (2007) also identified government bank underperformance in less-developed countries (LDCs)1 but not developed countries (DCs). So how could a well-accepted concept be suddenly refuted by the evidence observed during the financial crisis of 2008? We argue that the typical conclusion that government banks perform worse arises from cases where the GOB is requested to purchase a distressed bank. We thus propose a political hypothesis to explain why...
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