Abstract
This paper finds that lending by state banks is less procyclical than lending by private banks, especially in countries with good governance. Lending by state banks in high income countries is even countercyclical. On the liability side, state banks expand their total liabilities and, in particular, their non-deposit liabilities relatively little during booms. Public banks also report loan non-performance more evenly over the business cycle. Overall our results suggest that state banks can play a useful role in stabilizing credit over the business cycle as well as during periods of financial instability. However, the track record of state banks in credit allocation remains quite poor, questioning the wisdom of using state banks as a short term countercyclical tool.
Highlights
During the recent global financial crisis, several countries were forced to nationalize failing private banks
We find that lending by state banks is less procyclical than the lending by private banks, especially if the bank is located in a country with good governance
State banks increase their non-deposit liabilities relatively little during booms, especially if these banks are located in countries with good governance
Summary
During the recent global financial crisis, several countries were forced to nationalize failing private banks. Micco, Panizza and Yanez (2007) report that state-owned banks located in developing countries tend to have lower profitability and higher costs than their private counterparts. Cull and Martinez Peria (2012) examine the impact of bank ownership on credit growth in a sample of Latin American and Eastern European developing countries before and after the global financial crisis, finding mixed results. They show that state banks in Latin America acted in a countercyclical fashion during the crisis, whereas those in Eastern Europe did not, emphasizing regional differences. The bank crisis variable is a dummy variable signaling a country is experiencing a banking crisis (Laeven and Valencia, 2010)
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