Direct state interventions
in credit markets:
When are they justified?
César Calderón (FPDCE), Eva Gutiérrez (LCSPF), María Soledad
Martínez Pería (DECFP) and Carlos L. Vicente (FFSDR)
Roadmap
1.
2.
3.
4.
5.
6.
7.
Motivation
Key messages
Government ownership of banks: trends
Bank ownership and lending during crises
Long-run impact of government bank ownership
Other types of state intervention
Conclusions
1. Motivation
Recent crisis reignited debate on need for direct
government intervention in the financial sector.
•
Traditional tools:
– Balance sheet expansion of government-owned banks.
– Extension of government credit guarantees
•
Advanced countries: Unconventional macroeconomic
policies
•
Merits of government intervention:
– Countercyclical nature of public lending vs. potential
long-run implications of government ownership.
•
2. Key messages
Government-owned banks (GOBs) used to help kick-start
private bank lending.
•
–
Evidence during crisis is still far from conclusive.
Efforts to stabilize credit come at a cost:
•
–
–
Fiscal outlays to financial sector and rising public debt
Deterioration of loan quality and misallocation of resources
State devised strategies to prop up the financial sector
without relying on GOBs
•
–
–
Balance sheet expansion by Central Banks: Easier to unwind but face
hurdles in some EMs
Extension / renewal of credit guarantees
Credit guarantees
•
–
–
–
–
Limited evidence on financial and economic additionality.
Additionality brings along fiscal and economic costs
Design key to success of CGS
Needed: More rigorous assessments for most of these schemes.
3. Government ownership of banks
Trends
25
20
15
10
5
0
Industrial Countries
2001-07
Developing Countries
2001-10
Source: BRSS (The World Bank). Elaboration: GFDR Team.
3. Government ownership of banks
Trends
100%
80%
60%
40%
20%
0%
Sub Saharan Africa
Latin America
1970
East Asia and
Pacific
1985
1995
East Europe and
Central Asia
2002
2009
Source: Farazi, Feyen and Rocha (2010)
Middle East and
North Africa
South Asia
3. Government ownership of banks
Trends
ALL
Countries
Industrial
Countries
Developing
Countries
Countries with systemic/borderline banking crisis episodes
A. Period 2001-08 (Prior )
0.111
B. Period 2009-10 (GFC )
0.164 **
0.086
0.131 *
0.179
0.258
Countries without systemic/borderline banking crisis episodes
A. Period 2001-08 (Prior )
0.193
B. Period 2009-10 (GFC )
0.156 ##
0.025
0.006
0.206
0.168 ##
Notes: We define systemic countries as those that were experiencing episodes of systemic
banking crisis during the 2007-8 period according to Laeven and Valencia (2010). 1/ The
industrial countries with episodes of systemic crisis are: Austria, Belgium, Denmark, France,
Germany, Greece, Iceland, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden, United
Kindgom and United States. 2/ The non-high income countries in systemic crisis are:
Hungary, Kazakhstan, Latvia, Mongolia, Russia, Slovenia, Ukraine. **(*) denotes significance
at the 5 (10) percent level for H1 that GFC average is greater than prior. ## (#) denotes
significance at 5 (10) percent level for H1 that GFC average is smaller than prior.
Source: BRSS (The World Bank). Elaboration: GFDR Team.
4. Bank ownership and lending during the crisis
Why countercyclical action is needed?
• Premise: Recovery of the corporate sector may require the recovery of
the financial sector.
• Are “Phoenix miracles” plausible? Background paper by Ayyagari,
Demirguc Kunt, and Maksimovic (2011)
• Great deal of heterogeneity at the macro evidence –even when looking
at Phoenix miracles identified at the aggregate level.
• Microeconomic evidence greatly reduces the number of potential
miracles identified at the macro level.
• Evidence at the firm level suggests that recovery is not credit-less.
– Firms substitute short-term credit with long-term external finance either through
long-term borrowing or capital issuance.
• Phoenix miracles are not supported by micro level data either in the U.S.
or in emerging markets.
4. Bank ownership and lending during the crisis
Real GDP downturns
Real credit downturns
90%
60%
80%
50%
70%
60%
40%
50%
30%
40%
30%
20%
20%
10%
10%
Industrial Countries
Developing Countries
Industrial Countries
2010.1
2008.1
2006.1
2004.1
2002.1
2000.1
1998.1
1996.1
1994.1
1992.1
1990.1
1988.1
1986.1
1984.1
1982.1
1980.1
1978.1
1976.1
1974.1
1972.1
1970.1
2010.1
2008.1
2006.1
2004.1
2002.1
2000.1
1998.1
1996.1
1994.1
1992.1
1990.1
1988.1
1986.1
1984.1
1982.1
1980.1
1978.1
1976.1
1974.1
1972.1
0%
1970.1
0%
Developing Countries
Note: The figures present the percentage of countries sharing the contractionary phase of the cycle
of the corresponding variable. Elaboration: GFDR Team.
4. Bank ownership and lending during the crisis
Growth dynamics around credit
contractions (T)
0.01
Growth dynamics around credit
recoveries (T)
0.01
0.00
0.00
-0.01
-0.02
-0.01
-0.03
-0.02
-0.04
Industrial
Developing
T-12
T-11
T-10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T+11
T+12
-0.03
T-12
T-11
T-10
T-9
T-8
T-7
T-6
T-5
T-4
T-3
T-2
T-1
T
T+1
T+2
T+3
T+4
T+5
T+6
T+7
T+8
T+9
T+10
T+11
T+12
-0.05
Industrial
Developing
Note: The figures present YoY growth in real GDP around credit contractions and credit recoveries. Elaboration: GFDR Team.
4. Bank ownership and lending during the crisis
Country-level evidence
• Calderon (2011) examines whether the dynamic behavior of
credit around recessions that coincide with financial crises are
different in countries with high vis-à-vis low share of GOBs.
– Sample: 66 Countries, 1980q1-2010q4 (quarterly data)
– Identification of crisis-associated recessions:
• Real output recessions: Turning point algorithms (Harding and Pagan,
2002a, b)
• Financial crises: Laeven and Valencia (2008, 2010, 2011)
– Questions
• Are credit fluctuations sharper in crisis-associated recessions?
• In crisis-associated recessions, are credit fluctuations more volatile in
countries with high share of government-owned banks?
• Is the drop in credit larger OR the recovery faster in countries with high
share of government-owned banks?
• If dynamic behavior of credit is different across countries with different
shares of GOBs, does real output also depicts different behavior?
4. Bank ownership and lending during the crisis
Country-level evidence
• Quarterly information on credit and output for 66 countries for
the period 1980-2010.
– 21 industrial countries, 45 developing countries (mostly MICs)
– Countries with high share of GOBs: If participation in top quartile of distribution.
– Source of data: IFS, Haver Analytics, Datastream
• Method (Beck, Levine and Levkov, 2010): Quarterly dynamics of
credit around recessions that coincide with financial crises
−1
12
𝑖
𝛽𝑖 𝐷𝑐𝑡
+
𝐿𝑐𝑡 = 𝜇𝑐 + 𝜂𝑡 +
𝑖=−12
𝛽𝑖 𝐷𝑐𝑡𝑖 + 𝜀𝑐𝑡
𝑖=−1
• Dct is a binary variable equal to 1 for i=0 at start of crisis-related
recession. It is equal to 1 for i<0 (>0) in the i-th period before
(after) the crisis takes place.
•  coefficients exclude i=0 (start of recession). Dynamic behavior
of credit expressed relative to the quarter where recession starts.
4. Bank ownership and lending during the crisis
Country-level evidence
Real output (YoY growth)
Note: T represents the peak in real GDP (start of the recession period). Elaboration: GFDR Team.
Real credit per capita (YoY growth)
T+11
T+12
T+10
T+8
T+9
T+6
T+7
T+4
T+5
T+2
T+3
T
T+1
T-1
T-3
Real output (YoY growth)
T-2
T-5
T-4
T-7
T-6
T-9
T-8
T-10
T+12
T+10
Real credit per capita (YoY growth)
T+11
T+8
T+9
T+6
T+7
T+4
T+5
T+2
T+3
T
T+1
T-1
-0.15
T-3
-0.15
T-2
-0.10
T-5
-0.10
T-4
-0.05
T-7
-0.05
T-6
0.00
T-9
0.00
T-8
0.05
T-11
0.05
T-10
0.10
T-12
0.10
T-12
Evolution around real output recessions (T)
Countries with “high” GOB share
T-11
Evolution around real output recessions (T)
Countries with “low” GOB share
4. Bank ownership and lending during the crisis
Country-level evidence
Real output (YoY growth)
Real output (YoY growth)
Note: T represents the trough in real GDP (start of the recovery period). Elaboration: GFDR Team.
Real credit per capita (YoY growth)
T+11
T+12
T+9
T+10
T+7
T+8
T+5
T+6
T+4
T+2
T+3
T
T+1
T-2
T-1
T-4
T-3
T-6
T-5
T-8
T-7
T-9
T-10
T+12
T+10
Real credit per capita (YoY growth)
T+11
T+8
T+9
T+6
T+7
T+4
T+5
T+2
T+3
T
T+1
T-2
-0.20
T-1
-0.20
T-4
-0.15
T-3
-0.15
T-6
-0.10
T-5
-0.10
T-7
-0.05
T-9
-0.05
T-8
0.00
T-10
0.00
T-12
0.05
T-11
0.05
T-12
Evolution around real output recoveries (T)
Countries with “high” GOB share
T-11
Evolution around real output recoveries (T)
Countries with “low” GOB share
4. Bank ownership and lending during the crisis
Country-level evidence
No Crisis
Crisis
Note: T represents the peak in real GDP (start of the recession period). Elaboration: GFDR Team.
No Crisis
Crisis
T+12
T+11
T+9
T+10
T+8
T+7
T+6
T+5
T+4
T+3
T+2
T
T+1
T-1
T-2
T-3
T-4
T-5
T-6
T-7
T-8
T-9
T-10
T+12
T+11
T+9
T+10
T+8
T+7
T+6
T+5
-0.25
T+4
-0.25
T+3
-0.20
T+2
-0.20
T
-0.15
T+1
-0.15
T-1
-0.10
T-2
-0.10
T-3
-0.05
T-4
-0.05
T-5
0.00
T-6
0.00
T-7
0.05
T-8
0.05
T-9
0.10
T-10
0.10
T-11
0.15
T-12
0.15
T-11
Real credit per capita around output recessions
Countries with “high” GOB share
T-12
Real credit per capita around output recessions
Countries with “low” GOB share
4. Bank ownership and lending during the crisis
Country-level evidence
No Crisis
Crisis
Note: T represents the trough in real GDP (start of the recovery period). Elaboration: GFDR Team.
No Crisis
Crisis
T+12
T+11
T+9
T+10
T+8
T+7
T+6
T+5
T+4
T+3
T+2
T
T+1
T-1
T-2
T-3
T-4
T-5
T-6
T-7
T-8
T-9
T-10
T+12
T+11
T+9
T+10
T+8
T+7
T+6
T+5
-0.25
T+4
-0.25
T+3
-0.20
T+2
-0.20
T
-0.15
T+1
-0.15
T-1
-0.10
T-2
-0.10
T-3
-0.05
T-4
-0.05
T-5
0.00
T-6
0.00
T-7
0.05
T-8
0.05
T-9
0.10
T-10
0.10
T-11
0.15
T-12
0.15
T-11
Real credit per capita around output recoveries
Countries with “high” GOB share
T-12
Real credit per capita around output recoveries
Countries with “low” GOB share
4. Bank ownership and lending patterns during the crisis
Bank-level evidence from LAC and ECA
• Bonin, Cull and Martinez Peria (2011) study how bank
ownership affected credit growth in ECA and LAC before
and during the 2008-2009 crisis.
• Questions:
1. Did the crisis bring about a collapse in lending growth?
2. How did different types of loans react?
3. Was the impact of the crisis uniform across bank
ownership types or did foreign bank lending fall more
relative to domestic private and government-owned
banks?
4. Did government-owned banks step up their lending
during the crisis to mitigate the extent of the credit
contraction?
4. Bank ownership and lending patterns during the crisis
Bank-level evidence from LAC and ECA - Data
• Bonin, Cull and Martinez-Peria (2011) data: Bank-level
information for the period 2005-2009 for:
o 8 countries in Central and Eastern Europe
– Bulgaria, Croatia, Czech Republic, Hungary, Poland,
Romania, Slovakia, and Slovenia.
o 6 countries in Latin America
– Argentina, Brazil, Chile, Colombia, Mexico and Peru.
• Data comes from Bankscope and central bank webpages and
includes:
o Ownership information.
o Total loan volumes and loan amounts by type of loan
(corporate, consumer, and residential mortgages).
o Balance sheet and income statement data on size,
capitalization, liquidity, profitability, and funding structure.
4. Bank ownership and lending patterns during the crisis
Bank-level evidence from LAC and ECA - Estimations
Estimation strategy in Bonin, Cull and Martinez Peria (2011)
∆Li,t,j=
Fgni,t,j + Govti,t,j + Crisisi,t,j + Crisisi,t,jFgni,t,j +
Crisisi,t,jGovti,t,j + Xi,t-1,j + j + ui,t,j
(1)
i is the bank, t is the year, and j is the country.
∆Li,t,j is the growth of total gross loans (or of a certain loan category)
for bank i at time t in country j.
Fgn and Govt are dummies for foreign and government-owned
banks, respectively.
Crisis is a dummy which equals one during 2008 and 2009.
Xi,t-1,j is a matrix of bank characteristics (such as size, capital,
liquidity, profitability, funding) at t-1.
j are country fixed effects.
4. Bank ownership and lending patterns during the crisis
Bank-level evidence from LAC and ECA – Main findings
• There are significant differences across ECA and LAC in the
behavior of foreign and government-owned banks.
o In ECA, foreign bank total loan growth fell more than
domestic private bank credit growth during the crisis.
o Foreign banks in LAC did not fuel loan growth prior to the
crisis and did not contract their loans at a faster pace than
domestic banks.
o Government-owned bank lending growth in ECA did not
differ from the behavior of domestic private bank credit. In
general, government-owned banks in Eastern Europe did not
mitigate the impact of the crisis on credit.
o The opposite is true in LAC, where government-owned bank
lending growth during the crisis exceeded domestic and
foreign bank lending growth during this episode.
• Overall, our results caution against sweeping generalizations
about the behavior of foreign and government-owned banks
during the crisis.
4. Case studies: Poland
Behavior of a state-owned commercial bank
Changes in total loans to enterprises and
local government, 2008q3-2011q3 (QoQ %)
NPLs for PKO BP, foreign banks, and
the banking sector, 2008q3-2011q3
Source: Piatkowski, M., 2011. “PKO BP in Poland.” Washington, DC: The World Bank, ECSF2
4. Case studies: Brazil
Mobilizing public savings through GOBs
Raising public lending during
crisis in Brazil
BNDES: Increasing funding from
the government
Sources of Funding of BNDES
35%
(In billions of reais)
500
30%
450
25%
400
350
20%
300
15%
250
10%
200
5%
150
0%
100
50
Public
Private
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Jan-10
Jul-09
Oct-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
Jan-06
-5%
0
2007.12
Foreign
Source: Central Bank of Brazil – Statistics. BNDES: Relatorio Anual.
FAT
2008.12
Bonds
2009.12
Multilateral Institutions
2010.12
National Treasury
2011.9
4. Case Studies: Mexico
Expansion of DBs’ balance sheet (still below 2006)
20%
17%
14%
11%
8%
5%
Asset Share
Portfolio Share
Accummulated Growth Rates of
Balance Sheet Items
(percent, since June 2008)
60
400
300
200
100
0
40
20
Source: Gutierrez, E.M., 2012. “The Countercyclical role of Mexican
Development Banks.” Washington, DC: The World Bank, LCSPF
Liquid Assets and Investments (second. Axis)
Oct-11
Jun-11
Total Loan Portoflio Net
Aug-11
Apr-11
Feb-11
Dec-10
Oct-10
Aug-10
Jun-10
Apr-10
Feb-10
Oct-09
Dec-09
Aug-09
0
Jun-09
•
23%
Apr-09
•
Asset and Portfolio Share of Mexican
Development Banks in Total Bankin
Sector
Feb-09
•
Mid-1990s: Restructuring of Mexican
DBs to limit their leverage (e.g. the
rural credit development bank was
transformed into a trust fund) and to
focus on support to the private sector
through second tier operations.
Currently 6 DBs.
DBs’ share in total banking sector
assets and portfolio reduced
substantially.
Balance sheets expanded in response
to the global financial crisis. However,
their loan portfolio share relative to
the private banks remains smaller
than what it was in 2006.
Liquid assets and portfolio investment
grew much more than portfolio. While
in June 2008 such assets amounted to
60% of net loan portfolio, by Nov.
2011 stood at 140 percent.
Dec-08
•
4. Mexico: Counter-cyclical support to the private sector,
increasingly through first tier operations and guarantees
•
•
•
Overall credit growth rates for DBs mirrored
private sector growth rates. However, total credit
experienced sharp deceleration –consumer credit,
in particular. Credit to private sector grew mostly
through first tier operations.
For the system as a whole the loan portfolio
stabilized or began declining after December 2009.
Lending by Banobras continued to grow until June
2010, reflecting credit difficulties in some
municipalities. Bancomext has recently expanded
credit, through special programs to strategic
industries
DBs increased substantially their portfolio
guarantee . (40 percent). Since then the balance
has only decreased modestly (by about 10
percent). Guarantees granted by NAFIN have not
declined even when many of the programs that
provided access to working capital have expired.
Mexican Banks: Growth Rates of Gross Loan
Portolio
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
Gross Portfolio Dev. Banks
Net Loan Portfolio
(billions of pesos)
Nafin
Bancomext
Banobras
53.2
57.1
61.0
108.7
117.5
49.1
43.3
90.8
45.2
29.4
70.9
Jun-08
Dec-08
51.4
136.9
140.7
45.3
42.7
90.1
111.2
105.6
Jun-09
Dec-09
Jun-10
86.3
SHF
36.8
36.3
152.1
152.0
46.0
37.6
152.8
40.8
55.6
122.9
104.0
107.9
Dec-10
Jun-11
Partial Credit Guarantees
(billions of pesos)
Nafin
17.0
18.4
2.9 6.5
24.0 25.6
9.9 10.7
Source: Gutierrez, E.M., 2012. “The Countercyclical role of Mexican
Development Banks.” Washington, DC: The World Bank, LCSPF
Gross Portfolio Private banks
Banobras
Bancomext
Sociedad Hipotecaria Federal
34.8
27.4
26.4
27.1
25.3
5.8
10.1
4.8
10.8
5.0
10.5
6.1
10.2
6.0
11.2
26.7
30.3
28.2
29.2
28.3
4. Mexico: Portfolio expansion has not compromised the
financial position of the DBs. Fiscal Costs so far modest.
•
•
•
•
•
NPLs have remained at manageable levels (except for
SHF) and are well provisioned for ---with ratios in
excess of 200% (delinquency in guarantees not
available).
Banks have maintained positive profitability.
Banobras and Bancomext, who used to have negative
profitability, turned around .
Capital adequacy ratios have remained sound (no
lower than 14 percent for any bank).
Loans guaranteed by DBs are partially backed by
counter-guarantee funds for up to 7 bill. pesos
granted by various Ministries. Additional losses are
covered by DBs. Such funds are replenished annually
through budgetary appropriations.
Capital contributions were provided to the bank
(sometimes through the capitalization of benefits)
but in some cases capital declined due to operational
losses. Overall capital contributions amounted to 9
bill. Pesos since the crisis (about US 700 mill).
4.5
Non-Performing Loan Ratio
4.0
12.0
10.0
3.5
3.0
8.0
2.5
6.0
2.0
1.5
4.0
1.0
2.0
0.5
0.0
0.0
Development Banks
Banobras
Bancomext (second. Axis)
Nafin
Private Banks
SHF (second. Axis)
Capital
Capital
Contributions Increase
Bill. Pesos Since Sep. 08
Nafin
Bansefi
Banobras
Banjercito
Bancomext
SHF
5.2
0.5
0.1
0.0
2.6
0.8
3.9
0.7
0.3
2.4
1.5
0.4
Total
9.2
9.1
Source: Gutierrez, E.M., 2012. “The Countercyclical role of Mexican Development Banks.” Washington, DC: The World Bank, LCSPF
4. Bank ownership and lending patterns during the crisis
Mexico: Conclusions
•
•
•
•
•
Overall, DBs activities have had a counter-cyclical role during the downturn but
the portfolio of credit and guarantees is only decreasing very slowly.
However, Mexican banking sector development continued to lag with respect to
peers. Great needs for infrastructure financing may also justify increased
operations of Banobras, the DB that has extended its portfolio by most. Unclear
what is the optimal size of DB given existing market failures.
Increased operations did not seem to have compromised the financial position
of DBs.
Estimations of fiscal costs are still preliminary
Going forward maybe useful to target ranges for total DBs participation in the
banking sector, establishing mechanisms that facilitate expansion and
contraction of the balance sheet (and of capital in particular) to mitigate
incentives to compete with the private sector (as opposed to complement its
activities) during the upswing.
Source: Gutierrez, E.M., 2012. “The Countercyclical role of Mexican
Development Banks.” Washington, DC: The World Bank, LCSPF
4. Not all GOBs are alike!
Survey on Development Financial Institutions (DFIs)
• Survey on DFIs (de Luna Martinez and C. Vicente, 2011)
– 90 DFIs from 61 countries responded to the Survey (combined US$ 2 trillion in
assets and US$ 1.6 trillion in loan portfolio as of Dec. 2009)
– 72 questions on: size, ownership, funding, business models, corporate governance,
regulation and supervision, and challenges faced by DFIs
• Ownership: 66 DFIs are fully owned by the government
• Funding: 41% are deposit-taking DFIs, 89% can borrow from market,
40% receive govt. transfers, 60% enjoy government guarantees
• Lending models: (i) First-tier only (36%), (ii) Second-tier only (12%),
(iii) mixed (52%)
• Countercyclicality: DFI’s loan portfolio grew 36% in 2007-9 as
opposed to 10% increase in countries that responded the survey.
• Asset quality: 55% of DFIs report NPL ratios below 5% in 2009 (no
change from previous 3 years). Tier-II DFIs report even lower NPLs.
• Corporate governance: Boards dominated by government officials.
• Key Challenges: (a) Risk management, and (b) Self-sustainability.
4. Bank ownership and lending patterns during the crisis
Summary of Findings
• Evidence is far from conclusive on the performance of GOBs in propping
up credit and acting counter-cyclically.
• Government-owned banks appeared to have increased lending more
than domestic banks during the crisis in LAC but not in ECA.
• Case studies
– Poland:
•
Evidence far from conclusive whether PKO BP prop up financial conditions beyond the rest of the
banking system.
– Brazil:
•
•
GOBs expanded balance sheets to mitigate credit crunch.
Fiscal space generated in Brazil key to fund GOBs
– Mexico (E. Gutierrez)
•
DBs played countercyclical role (Tier-I operations and guarantees) but hard to unwind
– DFIs (de Luna Martínez and Vicente)
•
•
Most of them are fully-owned by government, can borrow from markets, have mixed lending model
Boards dominated by government officials and face challenges in risk management and selfsustainability.
• Still too early to sort out the costs in terms of efficient allocation of
resources.
5. The long-run impact of government ownership
Empirical evidence
Depth
100
75
50
25
Access
Efficiency
0
Stability
High GOB Share
Low GOB Share
Source: GFDR Financial Benchmarking Database, BRSS (The World Bank). Elaboration: GFDR Team.
5. The long-run impact of government ownership
Empirical evidence
Industrial Countries
Developing Countries
Depth
100
Access
Depth
100
75
75
50
50
25
25
Efficiency
0
Stability
High GOB Share
Access
Efficiency
0
Stability
Low GOB Share
High GOB Share
Low GOB Share
Source: GFDR Financial Benchmarking Database, BRSS (The World Bank). Elaboration: GFDR Team.
5. The long-run impact of government ownership
Empirical evidence
• The bulk of the empirical evidence suggests that government
bank ownership in developing countries has negative
consequences for financial and economic development. It tends
to be associated with:
o
o
o
o
o
o
Lower levels of financial development (Barth, Caprio, and Levine, 2001, 2004) .
More politically motivated lending (Dinc, 2005, Micco, Panizza and Yañez, 2007).
Lower banking sector outreach (Beck, Demirguc-Kunt, and Martinez Peria, 2007).
Wider intermediation spreads (La Porta et al. 2002).
Greater financial instability (Caprio and Martinez Peria, 2002).
Slower economic growth (La Porta, Lopez-de-Silanes, and Shleifer, 2002).
• Detailed within-country studies that are less susceptible to
endogeneity concerns and are better able to identify the impact
of government ownership, provide evidence consistent with the
bulk of the cross-country studies.
o See Sapienza (2004) , Khwaja and Mian (2005 ), Cole (2009a,b), Carvalho (2010).
5. Government ownership of banks
How to improve the effectiveness of GOBs? Policy issues
• Activity and performance of many (but not all) GOBs plagued by
problems of:
– Political interference in credit decisions
– Lack of managerial skills
• There are some bright spots: Identify “good practices” in terms of
institutional design (Scott, 2007; Rudolph, 2009; Gutierrez et al. 2011)
• Clear and sustainable mandate
– Target sector and complementarity with private sector
– Adequate risk management systems to guarantee financially sustainable business
– Funding from markets without explicit guarantee from government
• Corporate governance
– Transparent nomination of board members and selection of Senior management.
– Ownership policy (e.g. Sweden). Principles associated with sound commercial
practices, good corporate governance, competitive neutrality.
6. Other types of state intervention
Expansion of central bank’s balance sheets
United States
United Kingdom
3.0
300
2.5
250
2.0
200
150
1.5
100
1.0
50
0.5
Large-scale asset purchase program
Other assets
Bonds and securities
Ways & means advances to HM government
Longer-term reverse repos
Other assets
Short-term open market operations
Liquidity to key credit markets
Sources: (1) Federal Reserve Bank - Factors affecting reserves balances (http://www.federalreserve.gov/releases/h41/hist/).
(2) Bank of England (Monetary financial institutions' balance sheets, income and expenditure)
May-11
Jan-11
Mar-11
Nov-10
Jul-10
Sep-10
May-10
Jan-10
Mar-10
Nov-09
Jul-09
Sep-09
May-09
Jan-09
Mar-09
Nov-08
Jul-08
Sep-08
May-08
Jan-08
Mar-08
Nov-07
Jul-07
Sep-07
May-07
Jan-07
May-11
Jan-11
Mar-11
Nov-10
Jul-10
Sep-10
May-10
Jan-10
Mar-10
Nov-09
Jul-09
Lending to financial institutions
Sep-09
May-09
Jan-09
Mar-09
Nov-08
Jul-08
Sep-08
Mar-08
May-08
Jan-08
Nov-07
Jul-07
Sep-07
Jan-07
Mar-07
May-07
US Treasury Bills
Mar-07
0
0.0
6. Other types of state intervention
• Monetary authorities in advanced countries acted as
commercial banks.
– Purchases of private sector securities to inject liquidity
• Advantages of this type of intervention:
– Easier to wind down
– Smaller implementation lags
• Can EMs actively implement them?
– Setting up “open bank assistance” lines
• Obstacles?
–
–
–
–
Legal constraints
Disadvantages of not having a reserve currency
Credibility issues due to high-inflation episodes
Need strong corporate governance to avoid political interference
6. Other types of state intervention
Credit guarantee schemes (CGS)
• Credit guarantees are risk transfer and diversification mechanisms.
• Wide use of credit guarantees
– Mitigate credit crunch
– Provide access to under-served segments of the economy
• Some evidence on financial additionality (increase in credit to
previously rationed borrowers)
– Canada (Riding et al. 2007), Chile (Larraín and Quiroz, 2006; Cowan et al. 2008),
Japan (Uesugi et al. 2006; Wilcox and Yasuda, 2008), USA (Hancock, 2007)
• More scant evidence on economic additionality (improvements
in economic activity and employment)
– Employment effects in US (Craig et al. 2007) and economic activity in Korea (Kang
et al. 2008; Roper, 2009)
• Additionality comes at a cost:
– Sizeable displacement –e.g. Chile (Benavente et al. 2006)
– Allocation of resources to riskier firms –e.g. Japan (Ono et al. 2011)
– Allocation of resources to financially-unconstrained firms –e.g. Philippines
(Saldana, 2000), Pakistan (Zia, 2008).
6. Other types of state intervention:
Credit guarantee schemes (CGS)
• Design of CGS as key to its success
• Identification of good practices to guarantee scheme’s success
(Green, 2003; Beck et al. 2010; Honohan, 2010).
– Credit risk assessment practices outsourced to private sector.
– Broad rather than very specific targeting (bureaucratic costs and
misallocation of funding).
– Set coverage ratios such that lenders properly monitor borrowers -6070% (lender retains a significant part of the risk).
– Pricing policy should guarantee the fund’s sustainability and ensure
adequate participation.
– Payout of the guarantee should be structured so as to reduce incentives
of lenders to write-off loans after default.
– Risk management practices should reduce own ex-post exposure to
loan defaults (reinsurance, loan sales, portfolio securitization)
7. Concluding remarks
• In an effort to stabilize aggregate credit and prop up financial conditions,
the State has used:
– Government owned banks
– Other types of intervention (Central banks, GCS)
On Government-owned banks:
• Evidence far from conclusive on the performance of GOBs in mitigating
large credit contractions.
• Efforts to stabilize credit using GOBs may come at a cost (that still needs to
be sorted out)
– Lower quality of intermediation
– Misallocation of resources
On the expansion of balance sheets of the Central Bank
• Rapid implementation and easier to unwind
• Problems to implement in emerging markets
– Credibility issues in countries that suffered high inflation
– De Facto Central Bank independence
7. Concluding remarks
On the use of credit guarantees
• Some evidence of financial additionality
• Additionality may come at a cost: Misallocation of funds
• Literature still lacks rigorous assessments of these schemes.
Identification of good practices to boost the performance of State
• Government Owned Banks
–
–
–
–
Clear policy mandates
Adequate risk management systems to guarantee financial sustainability
Sound corporate governance practices
Ownership policy
• Government Credit Guarantees
–
–
–
–
–
Outsourcing credit assessment practices
Risk management practices to reduce default exposure
Coverage ratios so that there is an incentive to monitor borrowers
Pricing policies that guarantee financial sustainability
Payout mechanisms that reduce incentives of lenders to write-off loans after default.