THE NECESSITY OF A PUBLIC BANK
THE IMPORTANCE OF THE BANKING SYSTEM
The banking sector was always deemed to be one of the most vital sectors for the economy
to be able to function. Its importance as the “lifeblood” of economic activity, in collecting
deposits and providing credits to states and people, households and businesses is
undisputable.
In all economic systems, banks have the leading role in planning and implementing financial
policy. The difference lies with prioritizing goals and their way of achievement. Based on the
neo-liberal model, achieving greater profits by using all means is an end in itself, while in the
socialistic systems bank operations also aim at improving economy in general and at
satisfying social needs.
The financial crisis of 2008, and the way the governments chose to save the banks by laying
the burden on taxpayer shoulders while exercising austerity policies, triggered a cycle of
discussion over many crucial issues.
One of the basic questions was bank ownership, especially since banks were recapitalized
using state money.
The European leaders and institutional bodies have been promoting the idea of total
privatization of the production means and state owned enterprises, among which the bank
sector, especially in the countries under memorandum obligations, because, as they claim,
the state cannot be a businessman and privatization will contribute in reducing the national
debt.
There is however a strong opposition claiming that state owned enterprises – particularly
those whose character is monopolistic – and among these the banks that were recapitalized
using taxpayer money, must remain under state control because that is the only way for the
economy to really recover, and for the social interest to be placed over the pursuit of
profitability.
In the following lines I will try to prove that there is indeed need for at least one state bank,
especially in the current demanding environment, and I will address the creation of a proper
institutional framework to avoid phenomena similar to those of the recent past.
A BRIEF HISTORY – THE ROLE OF EUROPEAN LEADERS
As a result of the outset of the crisis in 2008 due of the banks’ exposure to particularly risky
products that were correctly described as “toxic”, the governments were faced with a very
“bizarre” situation.
The main characteristic of that situation was that no one could specify in all detail the quantity
of the money that would be required to put the economy back in balance.
The solution that was chosen at the time was to support the banks with large amounts of
capital, which would burden the annual deficits of the budgets and ultimately the national
debt, and the tax payers.
The private debt was transferred to the state, and became a public debt, which resulted in the
explosive increase of the latter, mainly in Europe.
The political leaders and the Commission officials saw in the particular occurrence a big
opportunity to promote and implement their neoliberal agendas.
In the small regional countries which had entered the support mechanism though
memorandums, i.e. Greece, Portugal, Ireland, and Cyprus, the particular policy was not
received without tensions.
From the aforementioned “rescued” cases, those of Ireland and Cyprus had to do with
banking sector, while Greece’s and Portugal’s problems were primarily fiscal.
However, things were not exactly like that, especially for Greece, but I will address that matter
shortly.
Spain also received financial assistance to resolve its bank imbalances, but the country’s size
and its importance for the stability of the European structure kept it from signing a
memorandum. It was deemed that signing a memorandum would cause political tensions, a
potential fall of the government of Rachoi and uncertainty for the future. Consequently, that
would lead to a new European crisis.
In this point we must stress Europe’s irrational decision to impose bank bail-ins on Cyprus,
which created an odd system for that country: although the country is part of the Eurozone, by
enforcing and applying capital controls, in reality it has been placed outside the eurosystem.
The European officials wanted to make it clear that this was not a capricious solution, so they
decided to promote it as the solution for any future bank rescues for the entire Europe.
Naturally, this increased uncertainty, people withdrew their deposits and capitals from the
banks and liquidity became even tighter.
As to the necessary unification of the banking sector in European level, and while the
implementation of the respective fiscal unification is in progress, the idea for a Banking Union
is blocked by the powerful countries, mostly Germany, which proves their intentions. At the
same time, positive ideas such as the pan-European guarantee scheme of deposits, the
extension of ESM’s role, the creation of a European debt agency or even the partial debt
pooling, if not entirely dismissed, they have been postponed indefinitely.
THE ROLE OF THE EUROPEAN CENTRAL BANK
At the beginning of the crisis, the ECB’s response could only be characterized as ineffective.
Let us remind you that under Mr. Trichet’s management, the ECB decided in 2008 to increase
euro’s key interest rates to maintain price stability.
The onset of the crisis forced the ECB to change its position within a few months and to
reduce the interest rates, but not as drastically as the circumstances called for.
At the same time, the ECB bought bonds mostly from the regional countries, Greece, Italy,
Spain and Portugal, to reduce the pressure on these countries’ bond prices and bring yields
down.
The change in ECB’s leadership, with Mr. Draghi being the new president, is considered to
have contributed to the change in ECB’s stance and to its better and swifter response to the
problems of the European economy.
Up to this day, Draghi’s “whatever it takes” statement in London is considered the main
reason for eurozone’s rescue.
Draghi’s management main decisions were the OMT (Outright monetary transactions ) and
the LTRO (Long-term refinancing operations).
The first involved buying bonds from European countries under the “conditionality” term that
these would sign binding agreements (memorandums) and ensure access to the markets.
So it is practically proven that by agreeing with the political leaders to maintain the policy of
austerity as the sole solution for fiscal consolidation, for deficits and debt reduction and for the
recovery of the economy, the ECB assumed a political role.
As to the LTRO, the ECB preferred to provide commercial banks with liquidity, without
however setting any particular terms, hoping that these would offer more loans to the private
sector.
However, the data on the countries of the European region show that the loans to enterprises
and to households have been reduced, while interest rates remain high, which results in the
reduction of competitiveness and the dramatic increase of bad loans.
At the same time, the massive amounts of liquidity that have been injected world-wide by the
central banks had a positive impact on state bond interest rates and caused a significant
increase of stock valuations.
However, Fed’s recent decision on tapering its policy of quantitative easing caused serious
problems to the developing countries, their currencies and bonds being the financial victims.
At the same time inflationary pressures increased after the rise of the prices of imported
goods, mainly the raw materials for energy (oil, natural gas, etc.), creating social problems to
a large part of those countries’ population.
Under the current circumstances the ECB continues to operate under the “wait and see” rule
despite the serious problems of credit crunch and high loan interest rates in the regional
countries and deflation’s appearance in the European economy (making some analysts talk of
japanization).
THE GREEK CASE
As we mentioned before, according to the official statements, the sole reason for signing the
Greek memorandum was the country’s bad fiscal situation.
However, a thorough examination of the facts and the history of certain events reveal a
different reality.
First, the first decision to reinforce the banks was made in 2008 when the then Greek
government was claiming that the crisis had not affected Greece.
The manager of the Bank of Greece declared his faith in the country’s bank system,
describing it as particularly strong, that it would meet the future challenges.
The initial support package, in the form of cash, the issuance of bonds exchangeable to
premium shares and warranties, was 28 billion euro. In current prices, Greece's GDP in 2008
was 233 billion euro. Therefore, in GDP terms, the help they provided reached the 12% of
GDP.
Thereafter and up to the debt restructuring in March of 2012, the Greek state guaranteed the
issuance of bonds from the banks for a total of 155 billion euro.
With the debt’s “haircut” in 2012 came the new support of 48.2 billion euro, despite the fact
that the banks’ losses from the Greek bond portfolio reached 25 billion euro.
If we sum all funds, the total bailout, with all the possible ways, to the Greek bank system
exceeded the 200 billion euro, or in GDP terms, was over 100% (53.5 billion euro in cash and
155 euro with guarantees through issuance of bonds).
Then the Bank of Greece and Troika divided the banks in systemic and non systemic ones, of
which three were totally private (Alpha, Piraeus, Eurobank), and in one of them the Greek
state kept a minority percentage on all shares (National Bank of Greece). Meanwhile they
decided to close two public banks (The Hellenic Post Bank and the Agrotiki Bank) because
they forbade the Greek state to recapitalize them by its own means.
Consequently the two state bank institutions came to private hands.
Then started the increases on the bank capital stocks, under the term that a future
privatization of the banks would be possible (within 4.5 years), provided that the private sector
would participate in the recapitalization process by at least 10%. In order to attract more
participants from the private sector they issued warrants, i.e. repurchase rights, with the
exercise of which the banks will be gradually privatized; the particular warrants were freely
offered to those who participated in the Capital Increases. The free offer of warrants is a
world-wide novelty; it was globally characterized as scandalous.
As we speak, they have decided to change the legislative framework to expedite bank
privatization by another eccentric procedure. The Greek Fund of Financial Stability is about to
buy the free-offered warrants and exchange them with its own common shares. Essentially,
the shares will be given to private shareholders, without them having paid one cent.
And if you wonder what the reaction is, let me say that the reactions are limited to the
parliamentary control, to press releases and to the public statements issued by the opposition,
since no organized protest exists by the citizens against such a sell-out of the public property!
Unfortunately, there are no social movements to attract the interests of the uninformed
citizens and to impose different policies.
The entire Greek system (all the government parties, bankers, business interests, Media)
wish for the aforementioned development, their goal being to perpetuate the existing situation,
because, it quite simply benefits their interests.
At the same time, the suggestions to create a bad bank under state control to resolve the
“bad” loans, which in Greece almost amount to 80 billion (approximately 35% of the total
loans) has been rejected, because banks want to manage these loans themselves and sell
them to funds (distress, vulture and hedge funds), to ensure that there will be greater profits.
But the social problem is growing and will keep doing so as the forced sales of real estates
are certain to intensify from the following year.
Any similarity with the promotion of respective actions and decisions for the Slovenian banks
should not be considered confidential.
INSTITUTIONAL INTERVENTIONS FOR THE BANKING SECTOR
Before addressing the matter of banks under state control, we must see some of the
institutional interventions that were made to ensure the bank sector’s normal operation.
Ensuring the proper operation of banks must be a first priority for all governments. The bank’s
role is to raise and safely keep the deposits of the households, of the businesses and
institutional organizations, and to finance real economy.
The banking system must be governed by a clear and austere legal and regulatory
framework.
Investment banking should be explicitly distinguished from retail banking.
As to the investment banks, specific limits must be set in risk taking.
Investment activities must be forbidden in retail banking.
Moreover, special minimum limits of capital adequacy must be set for both types of banks.
Monitoring mechanisms must exist and operate in national and international level.
The rate of retail bank assets to the GDP of the country they operate in, and the allowed
market shares must be specified. The phenomenon of 2008 with the banks that were too big
to fail, which in the meantime became even bigger and more systemic, must not be repeated.
Creating a fund to guarantee deposits and abandoning the idea of bail-in would be a positive
step towards restoring trust and reducing uncertainty throughout Europe.
An increase of the available funds to the ESM would also be advisable, through the creation
of credit lines with the ECB, in order for the bank recapitalizations to be performed by that
mechanism without any state interference.
Debt pooling, even a partial one, would have a positive impact; combined with ESM’s
reinforced role it would help break the interdependence of potential bank bailouts and public
debt.
I could state many more institutional interventions, but I will stick to those for there is no more
time.
THE NECESSITY OF A PUBLIC BANK
There could only be one answer to the question of what should happen to the banks that have
been recapitalized with tax payer’s money: they should be placed under state control.
Banks were under state ownership and control in Sweden during the 1990's, while bank
shares came to the hands of the state also in the USA, England, Spain, France, Belgium,
Germany, and other countries.
A state must have a say on whether or not banks should be under its ownership; it should not
be forced into selling its banks by foreign factors. Government should base their decisions on
the interests of their economy and society, rather than obeying the neo-liberal directions of the
Commission officials or the leaders of the powerful countries.
Let it be noted that the powerful countries chose for themselves different policies than those
they impose, especially when it comes to reducing social expenses, controlling banks and
other state enterprises, labor market, taxation, etc.
But what the experience from managing problems during a crisis such as the one we live for
the last four years in Greece has show, is that there must be at least one public bank, and
much more so, a very well organized and capital-strong bank.
Greece and other countries with similar banking problems have been engaged in serious
public debate on finding alternative tools to fund economy in order to restore its positive
growth rate.
However, as the world experience and respective literature have shown, only 25% of the
economic recovery is credit-less. Moreover, it has been proven that without adequate bank
participation, growth's momentum will decrease after the first three years.
In today’s uncertain situation, banks choose to deleverage balance sheets and manage bad
loans over offering new loans, which results in less liquidity for the real economy, which, in its
turn has serious economic and social effects: businesses keep closing, private citizens fall
bankrupt, unemployment increases and social problems intensify.
Instead of wishing for and prompting the domestic banks or supra-national organizations such
as the ECB and the European Investment Bank etc. to offer more grants, the solution bears
only one name: Public bank.
WHAT A PUBLIC BANK MUST BE
To begin with, public banks must not operate outside the total goals of a government's
development and economic policy.
The bank must have a leading role in the planned and applied economic policy, both in the
total planning, as in the financing of the real economy. In other words, the bank is a useful tool
for exercising policy, not a means to replace it, as has been happening in the last years in
Europe.
The importance of a public bank increases in periods of recession and deflation, where
conditions are created to reduce liquidity.
Public banks should have the tools to limit the adverse effects of the above phenomena, by
providing low interest rate credits, in order to set economy’s mechanism back in motion.
In several countries, mostly those in the Euroregion, private banks seem to be unable to act
as the economy’s lifeblood.
For that reason most of the developed and under-development countries of the world have
started debating over the necessity to create banking organisms under state control.
Even in the USA, the creation of state banks has found several supporters. The example of
the Bank of North Dakota, a depositary bank based at the homonymous state of the USA,
which offers low-interest rate loans to students, small businesses and start ups, cooperates
with private banks in purchasing house loans and buys the state municipality bonds, has
already become the centre of discussion among the financial cycles. BND and its mode of
operation is one of the basic reasons why the state of North Dakota shows the lowest levels
of unemployment and bankruptcies in the USA.
Let it be noted that public banks constitute 40% of the number of banks worldwide, most of
them being in the developing countries.
Is it a coincidence that in those countries, the impact of the recent crisis was much smaller?
Is it a coincidence that the greatest economic “miracles” only happened where governments
had their own state banks? Germany, Brazil, Japan, Singapore, and China are characteristic
examples.
In Europe we see the creation of development banks, with the recent examples of France and
Andalusia in Spain, who copied the success model of the German KfW.
People must know that KfW, and other development banks and bank service institutions are
exempt from the exceptionally demanding standards of capital adequacy posed by the Basel
(standards that affect a bank’s capacity to offer loans).
The question is: could powerful Germany be showing us an alternative way, a solution to fund
Europe’s powerless economies?
Returning to the issue of public banks, we must stress that it is operation does not in any way
focus on profitability, but on the satisfaction of development planning requirements and on
meeting society’s needs.
The bank’s goal is to present profits in order to increase its available funds and return them to
the government to reinforce the expenses of the social state. Profitability is the means that
amplifies the capacity of intervention, not the exclusive goal to satisfy its shareholders.
The significant difference between a public and a private bank is the absolute transparency
that governs the first’s operations.
Everything, from its statute, its bylaws, the code of corporate governance, to the investment
tools and the limits of risk taking etc. will be discussed with the society, the professional
agencies and the trade unions.
It is self-evident that such a bank’s operation must be legally established, in order to avoid
any misinterpretations and deviations from the intended purpose. Phenomena of bad
management, scandalous decisions, official interventions and free loans must be deterred
with the use of institutional tools. Otherwise, there will be strong criticism from the banking
establishment, trust would be shaken and many citizens would demand the bank’s closing.
At this point I will transfer the Greek experience where there have been phenomena of
mismanagement from the administrations of state banks, which, as we already mentioned are
under potential privatization.
At the same time, the state must make the corresponding decisions, to allow promoting the
idea of associated bank institutions, which may have a particular role to play in the entire
system. These banks could constitute the first cells of a different type of economy, especially
locally, and, in cooperation with the public bank –and with the use of appropriate tools- could
contribute with the progress of specific industries, cooperative and jointly liable business,
achieving regional development.
REFUTING THE ARGUMENTS AGAINST THE CREATION OF A PUBLIC BANK

Public banks are systemically riskier
In reality, it is just the opposite. It was the coordinated actions of governments and central
banks to rescue the financial institutions that were deemed too big to fail that saved the
banking system from total bankruptcy in the USA and Europe. Indicatively we must say that
USA gave the enormous amount of 16 trillion dollars to keep the banking industry alive!
But what was the main cause of the problems? It was the assumption of a huge investment
risk by the purchase of securitized mortgage loans and derivatives that almost blew out the
global system.
The role of public banks must be explicit, already from their statute. Their exclusive aim must
be to fund domestic economy, in clearer and more “economic” terms than those offered by
private banking institutions.
It is self-evident that they should not participate in profit making, particularly in investing in
shares, derivatives and toxic products, as unfortunately happened in many cases before the
crisis of 2008.
At the same time, any funding they offer must be a product of extensive study, to avoid
creating “bubble" conditions, for instance in the real estate market, and their internal
procedures should be clear and strict, to prevent their administrations from giving loans under
political pressure.
It is also necessary for them to have democratic and totally transparent operation rules, for
the tax payers to be able to be constantly informed on their administrations activities. That
would greatly help to limit taking non desirable risks and making of scandalous decisions that
could endanger the operation of the public banks.

Public banks cannot compete with the corresponding private ones.
First and foremost, all those who claim that public banks cannot compete with the private
ones, do not actually want any competition in the first place.
Greece’s example is characteristic; two public banks closed during the crisis: the Hellenic
Post Bank and Agrotiki Bank, whose financial figures were much higher than those of
corresponding private banks that acquired them.
It is worth mentioning that the Hellenic Post Bank received the third best rating in ECB's
stress tests in 2010 for the regulatory capitals Core Tier I in the entire European banking
system!
Despite all that, its participation, as well as the participation of the Agrotiki Bank in the
procedure of restructuring the Greek public debt, caused serious problems to its operation.
What caused a sensation was the fact that they chose to –essentially– give away the two
public banks to private ones, which, because of the distinction in good and bad ones, cost to
the Greek tax payers more money than it would cost to directly recapitalize them.
Moreover, we must say that the role of the public banks is not –and should not be- to compete
with the private sector’s financial institutions.
Public banks can operate in a complementary way with the private sector to fund the projects
that the private banks refuse to fund. A characteristic example is the businesses that fall in the
hands of the workers, the companies that have a cooperative form, those that the private
financial institutions consider “risky” borrowers.
We must not forget that refusing to fund the aforementioned types of companies also reveals
in part ideological differentiation and disagreement.
At the same time, public banks may fund states at much less cost than today. Consequently,
they may play a leading role in managing the debt and breaking the vicious cycle of
associating public debts and banks.

Public banks are not as effective as the private ones
As we already mentioned in several points above, public banks have a different role than the
private ones.
Their goal is neither to gain profit, nor to satisfy the shareholding state.
So it should not make a difference if they reach high profits and significantly high financial
ratios (ROE, ROI, etc.).
Therefore the use of financial ratios is not the proper means to prove the efficiency of the
public banks.

Public banks are used by political leaderships
Intervention from political leaders does occur. In many cases and in many countries politicians
pressed either for employing particular employees or for getting loans on friendly business
interests.
However, most examples of bad bank management have been confirmed in private credit
institutions. Especially the most important ones. If I remember correctly, the names Bear
Stearns, Lehman Brothers, Citigroup, Royal Bank of Scotland and others have nothing to do
with state banks.
However, to reduce the existing risk of political interventions, there must be an institutional
and legal establishment that will specify the transparent modus operandi and method of
decision making on the one hand and on the other hand that will allow for social control. It is
only through such procedure that we may ensure and guarantee that the operation of the
public bank will be unhindered and that the aforementioned intertwining with the state
authority will be avoided.
CONCLUSIONS
Our suggestion to the governments, especially the progressive ones, would be to promote the
banking system’s differentiated role in its entirety throughout Europe.
The first goal would be to change ECB’s statute. ECB’s goals should also comprise the
dimension of development and the unemployment rate. The second goal would be to make it
the last resort for all the member states of the eurozone without conditionality.
ECB’s change of role and the wrapping up of the banking union may help overcome the
fragmentation in the European banking sector, converge interest rate differences and restore
liquidity. Other prerequisites for trust restitution are to create a deposit guarantee fund, to
abandon any plans for future bail-ins, to increase ESM’s funds, to separate retail from
investment banking, and to specify each bank’s allowed size as to the GDP of the country it is
based and conducts business.
In a national level, governments should endorse the idea of having at least one public retail
bank (a public banking pillar) to create healthy competition, and a development bank that will
be exempted from the institutionalized standards of capital adequacy, in order to be used as
the basic tool to fund economy and to achieve positive growth.
What remains to be seen is the government intention to move to that direction.