Do we know it all? What are the real costs and benefits of public banks?

This web site belongs to 2010 number of posts by PhD students at work market.

There’s been a current rise in government intervention around the banking sector. These include a wave of governments overtaking charge of banking institutions throughout the 2008-09 economic crisis (Laeven and Valencia 2010) and lately introduced condition bills-driven through the nationwide public banking movement-that permitted the establishment of public banks within the U . s . States. Supporters of public banks reason that these banks could promote development by supplying credit to socially desirable projects.

This trend revives an essential prior discussion around the results of condition-owned banks on economic outcomes (La Porta et al. 2002). This discussion has two contrasting views. Around the one hands, the event view argues these banks can help to overcome financial market failures (Stiglitz 1993). However, the political look at government-owned banks argues that politicians distort lending to attain political goals (Shleifer and Vishny 1994).

My employment market paper contributes to this discussion, shedding light about how public banks affect real and financial outcomes, exploiting a banking reform that privatized several condition government-owned banks in South america. Overall, my evidence is much more in conjuction with the development look at public banks and never the political view. The paper offers proof of sizable negative economic and financial effects in the local level regardless of the results on banks’ profitability and financial strength after privatization.

Estimating the results of presidency Possession of Banks

These privatizations caused a decrease in the existence of government-owned banks, driven through the sharp loss of condition banks’ local participation. Throughout the reform, participant banks were restructured, using one of them, 13 banks were privatized. I contrast the differential results of participation within the reform by privatized and non-privatized banks, to exhibit the neighborhood results of public possession of banks around the economy. I personally use a singular data set which includes the timing from the reform and characteristics of bank branches, including physical location and native economic outcomes. Mixing these data enables me to determine a causal outcomes of the existence of government-owned banks and also the real economy.

To estimate the results of alterations in bank possession on lending supply, I take advantage of financial info on the world of bank branches in South america. To evaluate the actual results of these shocks, I personally use administrative info on the world of formal firms in the locality level. Using bank-level data, I additionally estimate the results from the measures taken throughout the reform process on their own profitability, financial strength, and efficiency. The character of my data assists you to control for time-different factors affecting the availability of banking services in the local level, for example local interest in credit, local business activities, and a few possible variations in institutional quality. This assists you to isolate the results of bank privatizations using their company confounding factors.

Branch Lending Supply and Operation

Figure 1 implies that branches of privatized banks possessed a large reduction in lending supply (-45.6%) and branch operation (-20.9%), in contrast to banks which were not privatized. Although all of the reform participant banks were similar prior to the reform and experienced exactly the same good bank/bad bank approach throughout the restructuring, branches of condition-owned banks that took part in the reform but weren’t privatized didn’t reduce the provision of credit or the prospect of branch closing.

Less economically developed areas possessed a 10% greater rise in closures, in contrast to more developed areas. Branches in areas without worrying about the acquirer prior to the reform had elevated closure possibility of 35.9%, during localities with the existence of the acquirer, this effect was 13.8%. This really is consistent with previous research that implies that public banks have different objective functions in contrast to private banks (Sapienza 2004 Sanches et al. 2018). These bigger recent results for less developed areas provide support for that development look at public banks (Stiglitz 1993). However, there’s no empirical support for that political view (Shleifer and Vishny 1994), because the effects are homogeneous among localities with various amounts of political attractiveness.

Some four line charts showing Figure 1 where branches of privatized banks possessed a large reduction in lending supply

Local Financial and Economic Effects

Using data in the local level, I evaluate the results of these shocks around the economy (figure 2). Localities which were uncovered to bank privatizations possessed a large, disproportional contraction in economic and financial outcomes . Local lending is 29% lower in contrast to the popularity within the locality before privatization. Such lending supply reduction was adopted with a contraction in employment, hrs labored, and wage bill of approximately 6%-8% below their trends. The localities also experienced a rise in credit market concentration and a decrease in financial deepening. Firms during these localities decreased in average size, and also the effects are concentrated in sectors which are more financially determined by exterior finance and medium and small-size enterprises. Localities which were uncovered to non-privatized banks didn’t react to the reform, in contrast to their pre-reform trend, searching in the same economic outcomes.

Some four line charts showing figure 2, the results of these shocks around the economy.

Costs and Benefits

Finally, I evaluate other aspects which are important when analyzing bank privatizations. I estimate the results from the reform on banks’ profitability, financial stability, and efficiency. Privatized banks possessed a sharp relative rise in returns on assets after privatization (7%). My results also claim that after privatization, these banks elevated their financial stability, solvency, and liquidity, and decreased non-performing lending. Therefore, the reform benefitted the central government’s finances and also the banking sector’s financial stability at the fee for unwanted effects around the local economy. My paper presents the very first time the trade-off between your possible advantages of public banks for that real economy and also the possible costs of those banks.

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