Public Banks in Latin America

Alejandro Micco & Ugo Panizza • • February 25, 2005

Public Banks in Latin America
Background paper prepared for the conference on Public Banks in Latin America: Myth and Reality Inter-American Development Bank (February 25, 2005)

Government ownership of banks is a major phenomenon worldwide. In 1995 the average percentage of state ownership in the banking industry around the world was about 41.6 percent (Figure 1). This share was even larger during the 1970s, when more than 50 percent of worldwide bank assets were controlled by the public sector. Ideological changes regarding the state’s role in the economy, as well as financial crises, led governments to privatize financial institutions. Megginson (2004) documents that worldwide, from 1987 to 2003 more than 250 banks were privatized, raising US$143 billion.

Read the entire report here.
The 2005 Conference details are here.

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3 Responses

  1. Can someone please interpret the significance of this article? Upon reading the conclusion it appears slightly pro-privatization and seems to assert that, in Latin American countries at least, that neither public or private banks are doing all that well.

    It is stated that in the last nine years privatized banks do not appear to have increased their profitability and efficiency. And also that a “large presence” of public banks does not result in increased credit access for small/medium business or for ventures that are not those of the wealthy. And finally that public banks are less “procyclical” than private banks. So the point is…???

    Prior to the conclusions there are these useful paragraphs:

    “[I]n industrial countries there is no statistically significant difference between the ROA (return on assets) of public banks and that of similar private banks (at 0.06 the coefficient is small and not even close to being statistically significant).
    These results are interesting because they show that it is not necessarily true that stateowned banks have lower profitability and confirm the results by Altunbas et al. (2001) who find
    that, in the case of Germany, there is no evidence that privately-owned banks are more efficient than public and mutual banks. At the same time, the results support the idea that, in developing countries public banks are less profitable than private banks.” Ideas for why this is are proffered but it would seem finding the answer here should be the main emphasis and the author would assert the need for more research in this area.

    Also, in the body there is this information which is contradicted in the conclusion. The conclusion states that public banks don’t offer more credit than private banks, yet in the body it states they do and also says that the evidence to base this conclusion on is “scarce.”

    “It shows that public banks charge lower interest rates than their
    private counterparts (this result is consistent with Sapienza’s 2003 findings for Italy) and also pay lower interest rates on their deposits (90 basis points less than private banks). It is also the case that public banks tend to lend more to the public sector.”

    Very confusing, is there anyone from Public Banking Institute who can help elucidate?

    • This is an old and biased study. Bank privatizations were ideologically and greed-driven — proceeds going to “elites” and offshore. More recent studies by Kurt von Mettenheim and Svetlana Adrianova (google them) show public banks growing and out-competing private, ironically making more money than private banks due to modernization and greater efficiency, despite not being profit driven, while at the same time providing advantages as tools for pro-active social-economic improvement.

  2. I think a point to take from the paper is that publicly-owned banks are prevalent in Latin America — that there is very good precedent for such banks.

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