Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Don't privatize banks too soon

28.01.2010
The research, led by Professor Panicos Demetriades of the University of Leicester, suggests that privatising government owned banks without having an effective system of regulation in place can result in a collapse of depositors' confidence in banking. This can not only undermine the ability of the banking system to finance economic growth but it can also trigger bank runs and financial instability.

The work, which is published in the Journal of Development Economics, shows that if financial regulation is ineffective depositors may prefer to place their money in government owned banks, which are frequently more trusted than private banks.

Professor Demetriades, of the Department of Economics at the University of Leicester, said: "If government owned banks are privatised prematurely, depositors will shift their funds not to private banks but to alternative assets that are deemed safer, such as domestic or foreign currency or real assets (e.g. houses, gold or consumer durables). This, in turn, means that the ability of the banking system to provide credit to businesses and households will be impaired.

"Moreover, rapid outflows of funds from one bank can create panic and may cause more widespread bank runs due to insufficient information and lack of confidence in regulation."

Professor Demetriades added that, naturally, there are concerns that governments may be unable to run nationalised banks efficiently. He states: "If so, this can well have a negative impact on long run growth. In the words of Financial Times journalist Martin Wolf "…crisis ridden private banking is bad; government monopoly banking is still worse' ."

Follow on research by Professor Demetriades and his co-authors suggests that such concerns may be unwarranted. This research, published in the University of Leicester's Economics Discussion Papers, shows that in recent years government ownership of banks has, if anything, been robustly associated with higher long run growth rates. Specifically, the researchers, who utilise data from a large number of countries for 1995-2007, find that – other things equal - countries with high degrees of government ownership of banking have grown faster than countries with few or no government owned banks.

The researchers provide a novel political economy explanation for their findings. They suggest that politicians may actually prefer banks not to be in the public sector. When banks are in theory controlled by their shareholders, in practice they are more likely to be controlled by their top managers because shareholders are typically not well informed. Conditions of weak corporate governance in banks provide fertile ground for quick enrichment for both bankers and politicians - at the expense ultimately of the taxpayer. In such circumstances politicians can offer bankers a system of weak regulation in exchange for party political contributions, positions on the boards of banks or lucrative consultancies. Activities that are more likely to provide both sides with quick returns are the more speculative ones, especially if they are sufficiently opaque as not to be well understood by the shareholders e.g. 'financial engineering' including complex derivatives trading and securitization of sub-prime loans.

Government owned banks, on the other hand, have less freedom to engage in speculative strategies that result in quick enrichment for bank insiders and politicians. Moreover, politicians tend to be held accountable for wrongdoings or bad management in the public sector but are typically only indirectly blamed for the misdemeanours of private banks – it is the shareholders who are expected to prevent these but lack of transparency and weak governance stops them from doing so in practice. On the other hand, when it comes to banks that are in the public sector, democratic accountability of politicians is more likely to discourage them from engaging in mutually beneficial speculation. In such banks, top managers are more likely to be compelled to focus on the more mundane job of financing real businesses and economic growth.

For more details about the research contact: Professor Panicos O. Demetriades (Tel: + 44 (0) 116-2522835 or +44 (0) 116-2522887, Email: pd28@le.ac.uk)

ESRC Press Office:
Danielle Moore (Tel: 01793 413122, email: danielle.moore@esrc.ac.uk)
Jeanine Woolley (Tel: 01793 413119, email: jeanine.woolley@esrc.ac.uk)
(Out of office hours number, Tel: 07554333336)
NOTES FOR EDITORS:
1. For further information: Andrianova, S., Demetriades, P. and Shortland, A. "Government Ownership of Banks, Institutions and Financial Development", Journal of Development Economics, vol. 85, 218-252.

Andrianova, S., Demetriades, P. and Shortland, A. (2009), "Is Government Ownership of Banks Really Harmful to Growth?", University of Leicester Discussion Paper in Economics 09/11.

2. 28 January: Word Economy & Finance Research programme conference

To mark the end of the World Economy and Finance Research Programme, this conference will bring together academics and people from government, politics, business, finance, media, NGOs, and the 'third sector'. The plan is to have three sessions each covering a topic of current interest, related to the work of the WEF Programme, each with three or four speakers, some from WEF, and others from the world at large. The presentations should be easily accessible, of general interest, and range widely over the issues; the sessions will include plenty of time for general discussion. For more information please see: World Economy and Finance

3. The Economic and Social Research Council (ESRC) is the UK's largest organisation for funding research on economic and social issues. It supports independent, high quality research which has an impact on business, the public sector and the third sector. The ESRC's planned total expenditure in 2009/10 is £204 million. At any one time the ESRC supports over 4,000 researchers and postgraduate students in academic institutions and independent research institutes. More at http://www.esrcsocietytoday.ac.uk

4. University of Leicester: A member of the 1994 Group of universities that shares a commitment to research excellence, high quality teaching and an outstanding student experience. http://www2.le.ac.uk/about/facts

Pressoffice | EurekAlert!
Further information:
http://www.esrc.ac.uk

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Temperature-controlled fiber-optic light source with liquid core

In a recent publication in the renowned journal Optica, scientists of Leibniz-Institute of Photonic Technology (Leibniz IPHT) in Jena showed that they can accurately control the optical properties of liquid-core fiber lasers and therefore their spectral band width by temperature and pressure tuning.

Already last year, the researchers provided experimental proof of a new dynamic of hybrid solitons– temporally and spectrally stationary light waves resulting...

Im Focus: Overdosing on Calcium

Nano crystals impact stem cell fate during bone formation

Scientists from the University of Freiburg and the University of Basel identified a master regulator for bone regeneration. Prasad Shastri, Professor of...

Im Focus: AchemAsia 2019 will take place in Shanghai

Moving into its fourth decade, AchemAsia is setting out for new horizons: The International Expo and Innovation Forum for Sustainable Chemical Production will take place from 21-23 May 2019 in Shanghai, China. With an updated event profile, the eleventh edition focusses on topics that are especially relevant for the Chinese process industry, putting a strong emphasis on sustainability and innovation.

Founded in 1989 as a spin-off of ACHEMA to cater to the needs of China’s then developing industry, AchemAsia has since grown into a platform where the latest...

Im Focus: First real-time test of Li-Fi utilization for the industrial Internet of Things

The BMBF-funded OWICELLS project was successfully completed with a final presentation at the BMW plant in Munich. The presentation demonstrated a Li-Fi communication with a mobile robot, while the robot carried out usual production processes (welding, moving and testing parts) in a 5x5m² production cell. The robust, optical wireless transmission is based on spatial diversity; in other words, data is sent and received simultaneously by several LEDs and several photodiodes. The system can transmit data at more than 100 Mbit/s and five milliseconds latency.

Modern production technologies in the automobile industry must become more flexible in order to fulfil individual customer requirements.

Im Focus: Sharp images with flexible fibers

An international team of scientists has discovered a new way to transfer image information through multimodal fibers with almost no distortion - even if the fiber is bent. The results of the study, to which scientist from the Leibniz-Institute of Photonic Technology Jena (Leibniz IPHT) contributed, were published on 6thJune in the highly-cited journal Physical Review Letters.

Endoscopes allow doctors to see into a patient’s body like through a keyhole. Typically, the images are transmitted via a bundle of several hundreds of optical...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Munich conference on asteroid detection, tracking and defense

13.06.2018 | Event News

2nd International Baltic Earth Conference in Denmark: “The Baltic Sea region in Transition”

08.06.2018 | Event News

ISEKI_Food 2018: Conference with Holistic View of Food Production

05.06.2018 | Event News

 
Latest News

Creating a new composite fuel for new-generation fast reactors

20.06.2018 | Materials Sciences

Game-changing finding pushes 3D-printing to the molecular limit

20.06.2018 | Materials Sciences

Could this material enable autonomous vehicles to come to market sooner?

20.06.2018 | Materials Sciences

VideoLinks
Science & Research
Overview of more VideoLinks >>>