Risk taking behavior of privatized banks

We examine the risk taking behavior of privatized banks prior to and after privatization and find that privatized banks experience a significant decrease in risk after privatization; however they continue to exhibit higher risk than their rivals. This finding is consistent with the assertion that following privatization and the removal of government guarantees and subsidies, privatized banks become more prudent. Since rival banks do not experience a significant change in risk taking, we attribute the reduction in risk experienced by the privatized banks to changes in the banks' ownership structure rather than to industry factors. Interestingly, we also find that a higher fraction of the privatized banks' shares sold beyond a certain intermediate level induces higher risk taking, as the privatized bank becomes more accountable to shareholders. The finding that the fraction of shares sold is positively related to risk taking, coupled with the result that the privatized banks had higher risk in the pre-privatization period than in the post-privatization period suggests a nonlinear relationship between government/private ownership of banks and risk taking. Results of further analysis are consistent with a somewhat U-shaped relationship between private ownership and risk taking. The risk taking behavior of newly privatized banks is also influenced by the country's level of development and degree of political risk. Our results are robust to different measures of risk.     

Deposit insurance coverage,ownership, and banks' risk-taking in emerging markets

We ask how deposit insurance systems and ownership of banks affect the degree of market discipline on banks' risk-taking. Market discipline is determined by the extent of explicit deposit insurance, as well as by the credibility of non-insurance of groups of depositors and other creditors. Furthermore, market discipline depends on the ownership structure of banks and the responsiveness of bank managers to market incentives. An expected U-shaped relationship between explicit deposit insurance coverage and banks' risk-taking is influenced by country specific institutional factors, including bank ownership. We analyze specifically how government ownership, foreign ownership and shareholder rights affect the disciplinary effect of partial deposit insurance systems in a cross-section analysis of industrial and emerging market economies, as well as in emerging markets alone. The coverage that maximizes market discipline depends on country-specific characteristics of bank governance. This “risk-minimizing” deposit insurance coverage is compared to the actual coverage in a group of countries in emerging markets in Eastern Europe and Asia.     

Do privatized banks in middle- and low-income countries perform better than rival banks? An intra-industry analysis of bank privatization

This paper presents a comprehensive analysis of the pre- and post-privatization operating performance and stock market performance of privatized banks and their rivals in middle- and low-income countries. First, we find that privatization announcements elicit negative abnormal returns for rival banks. The effects are more pronounced for subsequent tranche sales where the proportion of government ownership in the privatized bank is reduced. Second, we observe that the privatized banks underperformed the benchmark index in the long run. Investors who bought shares of the privatized banks on the first day of trading and held them for 5 years (instead of investing in the market index) lost 24% of their wealth. The underperformance is consistent with the negative long run returns that have been documented for initial public offerings. Third, we document marginal improvements in the post-privatization operating performance of the privatized banks. Though the privatized banks in middle- and low-income countries are better capitalized than rival banks, they carry higher problem loans and are overstaffed relative to other private banks in the post-privatization period. Since most of the sample firms are partially privatized, we submit that perhaps the continued government ownership of the privatized banks might have hindered managers’ ability to restructure the firms.     

Ownership change,institutional development and performance

This paper conducts a cross-country empirical study of the impact of institutions and agency conflicts on ownership reforms and their implications for changes in performance and efficiency. We examine two main questions. First, we evaluate the effects of certain property rights and institutional quality measures on performance and efficiency. We find that property rights and contracting rights protections contribute to stronger post-privatization performance. Second, we ask whether sectors undergoing changes from state to private ownership exhibit better or worse performance than sectors remaining public. We find an insignificant effect of privatization in ordinary least squares estimates and a negative short-term effect after correcting for endogeneity of privatization decisions that disappears in the long run, consistent with recently privatized enterprises facing short-run costs of restructuring and the challenges of mitigating agency and expropriation concerns.     

The political economy of residual state ownership in privatized firms: Evidence from emerging markets

We investigate the political determinants of residual state ownership for a unique database of 221 privatized firms operating in 27 emerging countries over the 1980 to 2001 period. After controlling for firm-level and other country-level characteristics, we find that the political institutions in place, namely, the political system and political constraints, are important determinants of residual state ownership in newly privatized firms. Unlike previous evidence that political ideology is an important determinant of privatization policies in developed countries, we find that right- or left-oriented governments do not behave differently in developing countries. These results confirm that privatization is politically constrained by dynamics that differ between countries.     

Bank privatization and performance: Empirical evidence from Nigeria

We assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990–2001. We find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation. Our results also suggest negative effects of the continuing minority government ownership on the performance of many Nigerian banks. Finally, our results complement aggregate indications of decreasing financial intermediation over the 1990s; banks that focused on investment in government bonds and non-lending activities enjoyed a relatively better performance.     

Corporate governance and bank performance: A joint analysis of the static,selection, and dynamic effects of domestic,foreign, and state ownership

We jointly analyze the static, selection, and dynamic effects of domestic, foreign, and state ownership on bank performance. We argue that it is important to include indicators of all the relevant governance effects in the same model. “Nonrobustness” checks (which purposely exclude some indicators) support this argument. Using data from Argentina in the 1990s, our strongest and most robust results concern state ownership. State-owned banks have poor long-term performance (static effect), those undergoing privatization had particularly poor performance beforehand (selection effect), and these banks dramatically improved following privatization (dynamic effect), although much of the measured improvement is likely due to placing nonperforming loans into residual entities, leaving “good” privatized banks.     

Bank ownership,privatization, and performance: Evidence from a transition country

This paper combines the static effect of ownership and the dynamic effect of privatization on bank performance in China over 1995–2010, reporting a significantly higher performance by private intermediaries – joint stock commercial banks and city commercial banks – relative to state-owned commercial banks. However, publicly traded banks, subject to multiple monitoring and vetting in capital markets, perform better regardless of ownership status. The privatization of banks has improved performance with respect to revenue inflow and efficiency gains in the short- or long-run (initial public offerings). The positive long-run effect is more relevant and significant for banking institutions with minority foreign ownership. Moreover, this paper innovatively estimates interest income efficiency and non-interest income efficiency at the same time. The results suggest that Chinese banks are much more efficient in generating interest income than raising non-interest revenue, although the latter aspect has improved significantly during the sample period.     

Competitive and value effects of bank privatization in developed countries

A special issue of the Journal of Banking and Finance (2005) devoted to the performance of privatized banks in middle- and low-income countries shows mixed results. In this paper, we present evidence that shows that privatized banks in developed countries have experienced significant improvements in operating performance. The improvement in performance remains significant after controlling for persistence in bank performance. A comparison of the performance of privatized banks in developed and developing countries suggests that privatization has encouraged excessive risk taking among privatized banks in developing countries, with the consequence that those banks carry large non-performing assets than their counterparts in the developed countries. We also observe that consistent with the competitive effects hypothesis, investors view privatization announcements as foreshadowing bad news for rival banks.     

Privatization and bank performance in developing countries

We examine the postprivatization performance of 81 banks from 22 developing countries. Our results suggest that: (i) On average, banks chosen for privatization have a lower economic efficiency, and a lower solvency than banks kept under government ownership. (ii) In the postprivatization period, profitability increases but, depending on the type of owner, efficiency, risk exposure and capitalization may worsen or improve. However, (iii) Over time, privatization yields significant improvements in economic efficiency and credit risk exposure. (iv) We also find that newly privatized banks that are controlled by local industrial groups become more exposed to credit risk and interest rate risk after privatization.     

The economics of bank privatization

This paper surveys the empirical literature examining bank privatization. We begin by documenting the extent of, theoretical rationale for, and measured performance of state-owned banks around the world, and then assess why many governments have chosen to privatize their often very large state-owned banking sectors. The empirical evidence clearly shows that state-owned banks are less efficient than privately owned banks, and that state domination of banking imposes increasingly severe penalties on those countries with the largest state banking sectors. On the other hand, there is little in the empirical record to suggest that privatization alone transforms the efficiency of divested banks, especially when these are only partially privatized. Privatization generally improves performance, but by far less than is typically observed in studies of non-financial industries. An increasingly common outcome of large-scale bank privatization programs is foreign ownership of many nations’ banking sector, which evidence suggests is usually positive in an economic sense, but problematic politically.     

The performance of privatized firms in the Czech Republic

With the growing importance of privatizations as a part of government policy, most empirical studies of these privatizations conclude that firm performance immediately improves following privatization. Privatization has been the most important part of the transition from the centrally planned economies of Central and Eastern Europe and has a larger impact on those economies than privatizations in other countries. However, few studies have looked at the performance of firms following mass privatization. This study uses 453 separate firms (101 firms privatized in both waves for a total of 554 observations), in the first and second waves of Czech voucher privatization. Using methodology from previous studies, we find that while the overall effects from privatization are positive, the effects vary by privatization wave, size, and industry. Firms privatized in the first wave performed worse (decline in performance following privatization) than firms privatized in the second wave. We also fail to find ownership concentration or debt as an important factor in restructuring the firm.I believe that the results are consistent with two hypotheses. First economic and political structure surrounding the privatization waves plays an important part in the success of privatization. Stable environments, both political and economic, help privatized firms restructure and improve operating performance as well as attract foreign investors and capital even in less developed countries, but in transitional economies undergoing mass privatization in rapidly changing and developing economic and political environments hinder firms from restructuring and improving performance following privatization. Results are also consistent with the hypothesis that firms with a longer preparation period prior to privatization, an “implicit seasoning”, improve performance following privatization.     

Does deposit insurance improve financial intermediation? Evidence from the Russian experiment

This study examines how the introduction of deposit insurance affects depositors and banks, using the deposit-insurance scheme introduced into the Russian banking system as a natural experiment. The fundamental research question is whether the introduction of deposit insurance leads to a more effective banking system as evidenced by increased deposit-taking and decreased reliance upon State-owned banks as custodians of retail deposits. We find that banks entering the new deposit-insurance system increase both their level of retail deposits and their ratios of retail deposits to total assets relative to banks that do not enter the new deposit insurance system. These results hold up in a multivariate panel-data analysis that controls for bank- and time-random effects. The longer a bank has been entered into the deposit insurance system, the greater is its level of deposits and its ratio of deposits to assets. Moreover, this effect is stronger for regional banks and for smaller banks. We also find that implementation of the new deposit-insurance system has the effect of “leveling the playing field” between State-owned banks and privately owned banks. Finally, we find strong evidence of moral hazard following implementation of deposit insurance in the form of increased bank risk-taking. Financial risk and, to a lesser degree, operating risk increase following implementation.     

Bank governance,regulation and risk taking

This paper conducts the first empirical assessment of theories concerning risk taking by banks, their ownership structures, and national bank regulations. We focus on conflicts between bank managers and owners over risk, and we show that bank risk taking varies positively with the comparative power of shareholders within the corporate governance structure of each bank. Moreover, we show that the relation between bank risk and capital regulations, deposit insurance policies, and restrictions on bank activities depends critically on each bank's ownership structure, such that the actual sign of the marginal effect of regulation on risk varies with ownership concentration. These findings show that the same regulation has different effects on bank risk taking depending on the bank's corporate governance structure.     

Determinants of state equity ownership,and its effect on value/performance: China's privatized firms

Evidence on the relationship between state ownership and performance in China's privatized firms is convex, concave and linear. Hence, the nature of this relationship is not resolved. This study examines this relationship for a larger, more recent sample of 4315 firm year observations of privatized Chinese firms during 1996–2003. Results support the hypothesis of a convex relationship between state ownership and performance showing benefits from strong privatization and state control. Not only is ownership structure found to affect performance, but also ownership concentration and balance of power jointly affect performance. Chinese firms with mixed control show significantly poorer performance than state or private controlled firms affirming the problem of ambiguity of ownership control, property rights, agency issues, profits and welfare objectives. New determinants of state ownership in China's firms are strategic importance, legal ownership, profitability, and market performance. Privatization benefits because there is a causal relation between ownership and performance.     

Bank Risk and Deposit Insurance

Arguing that a relatively high cost of deposit insurance indicatesthat a bank takes excessive risks, this article estimates thecost of deposit insurance for a large sample of banks in 14economies to assess the relationship between the risk-takingbehavior of banks and their corporate governance structure.The results suggest that banks with concentrated ownership tendto take the greatest risks, and those with dispersed ownershipengage in a relatively low level of risk taking. Moreover, asa proxy for bank risk, the cost of deposit insurance has somepower in predicting bank distress.     

Bank privatization in developing countries: A summary of lessons and findings

Although a large and growing literature shows that privatization can improve the performance of non-financial enterprises, there is less evidence on how it affects the performance of the banking sector. This paper summarizes the results from the papers in the special issue of the Journal of Banking and Finance on bank privatization. It concludes that although bank privatization usually improves bank efficiency, gains are greater when the government fully relinquishes control, when banks are privatized to strategic investors, when foreign banks are allowed to participate in the privatization process and when the government does not restrict competition.     

Bank performance,efficiency and ownership in transition countries

Using data from 1996 to 2000, we investigate the effects of ownership, especially by a strategic foreign owner, on bank efficiency for eleven transition countries in an unbalanced panel consisting of 225 banks and 856 observations. Applying stochastic frontier estimation procedures, we compute profit and cost efficiency taking account of both time and country effects directly. In second-stage regressions, we use the efficiency measures along with return on assets to investigate the influence of ownership type. With respect to the impact of ownership, we conclude that privatization by itself is not sufficient to increase bank efficiency as government-owned banks are not appreciably less efficient than domestic private banks. We find that foreign-owned banks are more cost-efficient than other banks and that they also provide better service, in particular if they have a strategic foreign owner. The remaining government-owned banks are less efficient in providing services, which is consistent with the hypothesis that the better banks were privatized first in transition countries.     

Ownership structure, market discipline, and banks’ risk-taking incentives under deposit insurance

The paper studies the effects of market discipline by creditors and ownership structure on banks’ risk taking in the presence of partial deposit insurance. An agency-cost model explains how the effects of creditor discipline and shareholder control are interdependent, the non-monotonic effect of shareholder control, and the role of leverage. Panel regressions on several hundred banks worldwide 1995-2005 confirm a negative individual risk effect of creditor discipline and the expected convex effect of shareholder control. Increased shareholder control significantly strengthens the negative effect of market discipline on asset risk, but joint effects on overall default risk are limited.     

Postprivatization corporate governance: The role of ownership structure and investor protection

We investigate the role of ownership structure and investor protection in postprivatization corporate governance. Using a sample of 209 privatized firms from 39 countries over the period 1980 to 2001, we find that the government relinquishes control over time to the benefit of local institutions, individuals, and foreign investors, and that private ownership tends to concentrate over time. Firm size, growth, and industry affiliation, privatization method, as well as the level of institutional development and investor protection, explain the cross-firm differences in ownership concentration. The positive effect of ownership concentration on firm performance matters more in countries with weak investor protection.