THE ECONOMICS OF BANK PRIVATIZATION

William L. Megginson Professor & Rainbolt Chair in Finance Michael F. Price College of Business

The University of Oklahoma

Preliminary draft November 18, 2003

Prepared for: Conference on Bank Privatization in Low and Middle Income Countries

Sponsored by the Finance Division of the Development Research Group, The World Bank Washington, DC

November 20-21, 2003

Abstract 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 far 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. Please address correspondence to: William L. Megginson Price College of Business 307 West Brooks, 205A Adams Hall The University of Oklahoma Noman, OK 73019-4005 Tel: (405) 325-2058; Fax: (405) 325-7688 e-mail: wmegginson@ou.edu website: http://faculty-staff.ou.edu/M/William.L.Megginson-1

THE ECONOMICS OF BANK PRIVATIZATION

During the past fifteen years, over 250 commercial banks have been fully or partially privatized

by governments of 59 countries either publicly through a public offerings of shares, or privately through

an asset sale. In almost every case, this represented a fundamental break with a national past that

emphasized the strategic role of commercial banking in funding the nation’s economic development, and

the national government’s key role in planning and directing that development.

This survey examines the empirical evidence examining why governments are choosing to

privatize their state-owned banks (SOBs), how they are selling SOBs, and whether these sales have, on

average, achieved the goals set by the divesting governments. As a first step in determining why

governments are privatizing banks, section 1 examines why these banks became state-owned in the first

place; section 2 then asks what caused societies to decide that state owned banking was not a good idea.

Section 3 assesses how governments privatize state-owned banks, while sections 4-6 survey the empirical

evidence regarding bank privatization in, respectively, developed countries, non-transition developing

countries and transition economies. Section 6 evaluates the empirical evidence examining the economic

efficiency of foreign ownership of banks, and then concludes.

1. Why Has State Ownership of Commercial Banks Been So Prevalent Historically?

Economists have debated the relative merits of state versus private ownership for centuries.

Perhaps the key industry has been banking. There is an enormous theoretical and empirical literature on

state versus private ownership of non-financial firms. This is surveyed in Megginson (2004), Chapter 2.

We focus here specifically on how this debate relates to state ownership of commercial banking, since

this is arguably the most basic industry in a modern economy because of its central role in allocating

capital and monitoring corporate borrowers.

Regardless of where they are located, how they are organized, or the structure of their ownership,

banks tend to perform three basic functions in any economic system. First, they play a central role in the

country’s payments system and also serve as a clearinghouse for payments. Second, they transform

claims issued by borrowers into other claims that depositors, creditors, or owners are willing to hold.

Third, banks provide a mechanism for evaluating, pricing and monitoring the credit granting function in

an economy. Of course, the efficiency, safety, effectiveness and transparency of these functions varies

widely across countries depending on, among other things, who owns the banks, how the credit-granting

process is managed and to whom credit is granted, and the degree to which bank-issued claims are held

with some confidence by the non-bank public. In the context of a country with a long history of state

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ownership of commercial banks—or even significant state influence over commercial banking—these

efficiency, safety, and transparency concerns are often infinitely more complex and intractable than is

more laissez-faire economies.

1.1. The Theoretical Case for State Ownership of Banks

During the modern era, proponents of state ownership have justified government control of

business in three principal ways. First, public ownership has been justified as a way to ensure that

business enterprises balance social and economic objectives, rather than focusing exclusively on profit

maximization. Second, state ownership has been motivated as a response to significant market failures—

particularly the challenges posed to economic efficiency by natural monopolies—and as a method to

internalize production externalities such as pollution. Third, proponents assert that public ownership can

be justified under certain conditions involving informational asymmetries between principal (the public)

and agent (the producer), where complete contracts cannot be written and enforced. Underlying all three

cases is the assumption that governments can and do act benevolently, and thus that state ownership is

economically efficient. Certainly, state ownership has also been imposed many times in history by

ascendant political parties specifically in order to redistribute wealth and income from less to more

“deserving” members of society, but this exercise in raw political power is usually justified by dogma,

rather than by serious economic theory.

State ownership of banking both grew from the broader trend towards state ownership and was

driven by specific factors. “Benevolent” reasons include a perceived lack of private capital with sufficient

risk tolerance to finance growth; inadequate funding to sectors and groups with low financial but high

social returns; a desire to promote industrialization and development at a pace more rapid than private

financing would allow; and a desire to maintain domestic control over a nation’s financial system. Less

attractive, but equally compelling reasons include ideology (punishing capitalists), a desire to

disenfranchise politically unpopular groups (postwar France’s perception that main banks collaborated

with Nazi occupiers); a reaction to foreign dominance for newly independent former colonies and a desire

to use banks as tools for political patronage and advantage.

1.2. The Extent of State Ownership in Practice

There can be little doubt that state ownership of banking has proven popular historically. Table 1

shows the extent of government ownership as of the year 1999. This table uses 1999 data, presented in

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Barth, Caprio and Levine (2001), but organizes the countries listed by their commercial legal system, as

suggested by LaPorta, Lopez-de-Silanes, Shleifer and Vishny (1998, 2002).

**** Insert Table 1 about here ****

Several trends can be observed from this table. First, it is clear that state ownership is widespread,

particularly in developing countries. What this cross-sectional listing does not show, however, is that state

ownership has been declining steadily over time, and this has accelerated dramatically since the late

1980s. Second, state ownership is higher in countries with a socialist legal tradition than in any other.

This is hardly surprising, since banks were central tools of control and credit allocation in the command

and control communist system that developed in the Soviet Union after 1917, and was then imposed on

CEE after WWI. These countries began privatizing after winning their independence in 1989, but they

have had insufficient time to completely divest their holdings.

Third, countries with French civil law commercial codes have generally higher state ownership

than those with German or English common law codes. This difference was vastly more pronounced

before 1993, however, when the core French civil law states in Western Europe (France, Spain, Portugal,

Belgium) all had banking sectors that were dominated by state ownership. Beginning with France in

1986-87, however, all these countries launched massive privatization drives and now very few banks

remain in state hands in any of these core civil law countries.

This observation, that the western countries most wedded to state ownership historically have

almost completely privatized their banking sectors, brings up the natural question: Why did the most

enthusiastic supporters of state-owned banking decide to divest their ownership, and why did other less

enthusiastic countries also launch significant banking privatization programs during the past two decades?

2. Why Have Governments Launched Bank Privatization Programs?

As discussed briefly above, huge segments of the global banking system have been transferred

from state to private hands over the past two decades, and much more is poised to do so in the near

future—particularly in the emerging powerhouses of India and China. What has caused this fundamental

reassessment of state ownership of banking? Two factors stand out as especially important. First,

compelling and overwhelming evidence began to accumulate showing that state ownership was not

working as planned. The second, factor was a dawning realization that this really mattered—that financial

system development promoted economic growth. We look at each influence below.

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2.1. Motives for Commercial Bank Privatization

Not all commercial bank privatizations are similarly motivated. At least four reasons for bank

privatization can be identified in countries around the world. First, in formerly socialist economies,

privatization has occurred on a widespread scale in many industries, as discussed in detail in Megginson

and Netter (2001). In these situations, bank privatizations occur as part of the overall transitioning to a

more market-based economic system. However, these countries also provide the biggest challenge to

successful privatization because so much of the credit previously provided by the monobank systems was

granted to SOEs, which tend to be of very poor credit quality. As such, banks in transition economies

tend to be plagued with the greatest loan quality problems of all bank privatizations.

Second, in some countries there may be a program underway to de-nationalize the limited number

of sectors or firms that are state-owned. In such situations, privatization is less likely to offer as great a

challenge, at least in the loan quality area. Third, in some economies there may be ongoing efforts to

deregulate the overall financial system. In this regard, bank privatizations are a necessary ingredient of

the overall deregulation effort. Finally, the governments in some countries may have the primary

objective of raising funds for the government itself. As such, banks may simply be one of the vehicles in

the “revenue privatization” motive.

2.2. The Theoretical Case against State Ownership of Banks

Economists have offered three principal reasons why state ownership will be inherently less

efficient than private ownership, even under the assumption of a benevolent government owner. First,

SOE managers will have weaker and/or more adverse incentives than will managers of privately owned

firms, and thus will be less diligent in maximizing revenues and (especially) minimizing costs. Second,

state enterprises will be subject to less intense monitoring by owners, both because of collective action

problems--potential monitors have less incentive to carefully observe managerial performance because

they bear all the costs of doping so but reap only a fraction of the rewards--and because there are few

effective methods of effectively disciplining SOE managers in the event that sub-par performance is

detected. Third, the politicians who oversee SOE operations cannot credibly commit to bankrupting

poorly performing SOEs, or even to withholding additional subsidized funding, so state enterprises

inevitably face soft budget constraints. It bears repeating that these criticisms of state ownership are valid

even if one grants that the politicians who create and supervise public enterprises have benevolent

intentions.

The final, and in many ways most compelling, critique of state ownership is that SOEs will be

inefficient by design, since they are created specifically so that politicians can use them to benefit their

own supporters at the expense of another group in society. Numerous researchers—including Jones

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(1985), Vickers and Yarrow (1988, 1991), Stiglitz (1993), Nellis (1994), Shleifer and Vishny (1994),

Boyko, Shleifer and Vishny (1996a,b), Shleifer (1998), Sappington and Sidak (1999) and Shirley and

Walsh (2000)--note that state enterprises can be remarkably effective tools of redistributive politics. Since

state firms answer to political masters, rather than the market, wide divergences from profit-maximizing

behavior are not only possible, they are in fact desired. Even in fully competitive markets, Shleifer and

Vishny (1994) show that SOEs will be inefficient because politicians force them to pursue non-economic

objectives, such as maintaining excess employment, building factories in politically (but not

economically) desirable locations, and pricing outputs at below market clearing prices.

2.3. The Empirical Evidence on State Ownership of Commercial Banks

In his survey of the empirical evidence on state ownership of non-financial enterprises,

Megginson (2004) asks, “Given the large number of empirical studies produced during the last fifteen

years, has empirical research generated a conclusive answer regarding the relative efficiency of state

versus private ownership?” He concludes that, “fairly clearly, it has, and the answer is that private

ownership must be considered superior to state ownership in all but the most narrowly defined fields or

under very special circumstances. The empirical evidence clearly supports this conclusion—see, in

particular, Dewenter and Malatesta (2000) and Djankov and Murrell (2002)—and the only major recent

studies surveyed by Megginson that do not unequivocally support private over state ownership are Kole

and Mulherin (1997) and Kwoka (2002). Even their results do not favor state ownership but rather

demonstrate only that private ownership is not always superior.”

Does the evidence regarding state ownership of banking point to a similar conclusion? Table 2

details the empirical evidence on state versus private ownership of banking, and the overall picture that

emerges is extremely damaging for proponents of government ownership. One of the first studies is

Bhattacharya, Lovell and Sahay (1997), who employ data envelope analysis to examine the relative

efficiency of 70 state-, foreign- and privately-owned banks in India during the early stages (1986-1991) of

liberalization. Prior to 1970, only one bank in India was state-owned, but a wave of nationalizations in

that year and in 1980 created a banking system that was dominated by government-owned institutions.

They find that, during the study period, publicly-owned banks are the most efficient and privately-owned

banks the least efficient at delivering financial services to customers. However, their most striking finding

is that foreign-owned banks increase market share significantly during this period, primarily at the

expense of state banks. These results are rather surprising, since studies of the relative efficiency of state-

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owned, mixed and privately-owned non-financial enterprises in India show diametrically opposite

results.1

**** Insert Table 2 about here ****

LaPorta, Lopez-de-Silanes, Shleifer (2002) examine the importance and impact of state

ownership in this key industry. Using data from 92 countries, they examine whether government

ownership of banks impacts the level of financial system development, rate of economic growth, and

growth rate of productivity. They test whether government ownership of banks is motivated by

benevolent, “development” objectives or by redistributive “political” objectives. They find that

government ownership is extensive, especially in the poorest countries. They also find that these holdings

retard financial system development and restrict economic growth rates, mostly due to the impact of state

ownership—and the monopoly power frequently attendant thereto--on productivity. Higher government

ownership in 1970 is associated with significantly slower subsequent financial development and lower

growth in per capita income and productivity. This evidence supports the political view of state ownership

of banks.

Bonin, Hasan and Paul Wachtel (2002) examine the impact of ownership structure (state, private

and foreign ownership) on bank performance in the six transition economies of Bulgaria, Croatia, the

Czech Republic, Hungary, Poland and Romania. Their sample has 222 observations with financial and

ownership data from these six countries for the years 1999 and 2000. About three-quarters of the banks

are fully private and about 40 percent of these are completely foreign owned. Not surprisingly, wholly

foreign-owned banks tend to be created by greenfield investment, while the majority foreign-owned banks

tend to be banks privatized to a foreign strategic investor. Almost 60 percent of the banks in the region

are at least majority foreign-owned, while less than 15 percent remain majority state-owned. These

authors find robust evidence that profitability—measured by return on assets and return on equity-- is

higher for fully private banks than for banks with some state ownership, and is the highest of all for

wholly foreign-owned banks. Foreign banks also experience the most rapid increase in customer loans.

Barth, Caprio and Levine (2003) use a new database on bank regulation and supervision in 107

countries to assess the relationship between specific regulatory and supervisory practices and banking-

1 In particular, Majumdar (1996) shows that Indian SOEs are vastly less efficient than private firms of comparable size. Using industry-level survey data, evaluates the performance differences between SOEs, MEs, and privately-owned Indian companies for the period 1973-1989. SOEs and MEs account for 37% of employment and 66% of capital investment in India in 1989. Document efficiency scores averaging 0.975 for privately-owned firms, which are significantly higher than the average 0.912 for MEs and 0.638 for SOEs. State sector efficiency improves during concerted “efficiency drives” but declines afterwards.

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sector development, efficiency, and fragility. They also examine the relationship between state ownership

and these measures of banking-sector development. They find that government ownership of banks is

negatively correlated with favorable banking outcomes and positively linked with corruption. However,

government ownership does not retain an independent, robust association with bank development,

efficiency or stability when other features of the regulatory and supervisory environment are controlled

for. On the other hand, there is certainly no evidence, even in weak institutional settings, that

government-owned banks are associated with positive outcomes.

Sapienza (2003) studies the effects of government ownership on bank lending behavior using

information on the pricing of individual loan contracts between Italian banks and customers over the

period 1991 to 1995. He exploits the fact that all Italian banks have access to an unusually detailed and

informative database on corporate borrowers, which negates the impact of differential credit evaluation

skills on the loan pricing decision. He further controls for within-sample differences by examining a

matched set of 110,786 company-bank-year observations of lines of credit extended to 6,968 companies.

55,393 observations refer to borrowers from state-owned banks and 55,393 refer to borrowers from

privately owned banks. Sapienza finds that borrowers from state-owned banks pay an average of 44 basis

points less than do borrowers from private banks. He also shows that the voting pattern of the region

where the loan is booked and the party of the state bank’s CEO significantly influence the price of loans.

These results strongly support the political view of state bank ownership over the competing social and

agency cost views.

Cornette, Guo, Khaksari and Tehranian (2003) examine performance differences between

privately-owned and state-owned banks in sixteen Far East countries from 1989 through 1998. They find

that state-owned banks are significantly less profitable than privately owned banks due to state banks’

lower capital ratios, greater credit risk, lower liquidity and lower management efficiency. While the

performance of all banks deteriorated significantly at the beginning of the Asian economic crisis in 1997

and 1998, state banks’ performance deteriorated more than did that of private banks and performance

differences are most acute in those countries where government involvement in the banking system is the

greatest. Economic growth is also slower in these countries, and there is less financial development.

In sum, the weight of empirical evidence now clearly suggests that state ownership of commercial

banks yields few benefits, yet is associated with many negative economic outcomes. Whatever the

motivations once were for launching state-owned banks, this experiment in state planning must now be

considered a systemic failure, and this conclusion helps explain why so many governments have launched

large-scale bank privatization programs. We are thus almost ready to analyze how governments privatize,

and assessing which specific institutions are selected for divestment. Before doing so, however, we

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should briefly examine the role state-owned banks play in the problem of soft budget constraints for

current or former SOEs.

2.4. State-Owned Banks and Soft Budget Constraints: Theory and Evidence

If the managers of a private firm are not operating efficiently, they will be replaced either by the

current shareholders or as the result of a hostile takeover. If a private firm cannot compete effectively,

suppliers of capital will cease funding the company’s operations--and in the extreme the firm will be

forced into bankruptcy and liquidated. What are the equivalent public sector disciplinary tools? Empirical

evidence suggests that SOE managers are rarely punished individually for poor performance, but what

about withholding of capital resources? In real life, the state is unlikely to allow a large SOE to face

bankruptcy, thus the discipline enforced on private firms by the capital markets and the threat of financial

distress is lacking for state-owned firms. Since managers of less-prosperous state firms know they can

rely on the government for funding, these firms are said to face “soft” budget constraints.

Kornai (1988, 1993, 1998), Berglof and Roland (1998), Lin, Cai and Li (1998), Frydman, Gray,

Hessel, and Rapaczynski (2000) and several other authors all suggest that soft budget constraints (SBCs)

were a major source of inefficiency in Communist firms, and that these SBCs have continued through

much of the post-communist transition period. Soft budget constraints are not limited to transition

economies, however. Sheshinski and Lopez-Calva (1999) assert that public ownership inevitably leads to

SBCs. They present a simple model showing that governments will choose to extend subsidies to failing

state enterprises whenever the political costs of allowing a SOE to go bankrupt outweigh the political

costs of subsidization. In addition to inhibiting efforts by politicians to impose hard budget constraints,

this fear of financial distress can also preclude initiatives to force state enterprises to restructure, or to

open monopolized industries to private-sector competition. Since large SOEs are too big and too

politically important to fail, their very weakness protects them from the type of effective discipline to

which private firms are continuously subjected.

Much of the empirical evidence on soft budget constraints examines whether it is in fact possible

to impose hard budgets constraints on loss-making SOEs and, if so, whether this improves corporate

performance. Numerous articles examine whether soft budget constraints are a problem in transition

countries. However, in this section we discuss only those studies that employ either multi-national

samples or particularly extensive single-country samples and are thus most generalizeable. These studies

are summarized in Table 3. A complete listing and analysis of all studies of SBCs is presented in chapters

2 and 5 of Megginson (2004).

**** Insert Table 3 about here ****

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A very important study of the effects of SBCs in transition economies is Frydman, Gray, Hessel

and Rapaczynski (2000), who examine whether the imposition of hard budget constraints is alone

sufficient to improve corporate performance in the Czech Republic, Hungary and Poland. They employ a

sample of 216 firms, split between state-owned (31%), privatized (43%), and private (26%) firms, and

find that privatization alone adds nearly 10 percentage points to the revenue growth of a firm sold to

outside owners. Most important, they find that the threat of hard budget constraints for poorly performing

SOEs falters, since governments are unwilling to allow these firms to fail. The brunt of SOEs’ lower

creditworthiness falls on state creditors.

Bertero and Rondi (2000) employ a sample of 150 Italian manufacturing SOES, with 1,278 firm-

year observations, to examine whether imposition of a hard budget constraint can improve SOE

performance. They exploit the fact that the fiscal environment became much tighter for Italian state

enterprises during the late 1980s, as budget deficits became larger and the public debt reached

unsustainable levels. They find that the SOE firms’ responses to increased debt during the hard budget

constraint period, 1988-93, is consistent with financial pressure, but is not during the soft budget

constraint period of 1977-87. Only during the later period do firms respond to financial pressure by

increasing total factor productivity and reducing employment. In other words, when hard budget

constraints can be credibly imposed on SOEs, they do promote greater efficiency even in the absence of

ownership changes.

Lizal and Svejnar (2001) examine strategic restructuring and new investment performance of

4,000 Czech companies during 1992-98. Dataset includes over 83,000 quarterly observations. Develop

and test a dynamic model of restructuring and investment, allowing them to examine separable impact of

private versus public and domestic versus foreign ownership on restructuring, as well as the importance of

access to credit and a soft budget constraint on firm investment. Find that (1) foreign owned companies

invest the most and (domestically owned) cooperatives the least; (2) private firms do not invest more than

state-owned firms; (30 cooperatives and small firms are credit rationed; and (4) SOEs operate under a soft

budget constraint.

Coricelli and Djankov (2001) identify the presence of soft budget constraints and analyze their

impact on enterprise restructuring in Romania during the initial transition period. They employ a simple

analytical model and a sample of 4,429 enterprises with data from 1992-95 to test whether hardening

budget constraints promotes beneficial restructuring and new investment or whether access to external

financing is required to promote new investment. They find that hard budget constraints (HBCs) do

promote passive restructuring, in the form of labor shedding, but not new investment. Active restructuring

requires access to external financing. Tightened bank credit can induce HBCs and raise enterprise

efficiency in the short-run, but at the cost of curtailing investment.

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Cull, Matesova and Shirley (2002) examine the incentives that managers of voucher-privatized

Czech companies have to “tunnel” (strip assets out of companies at the expense of outside shareholders)

and “loot” their companies. Looting occurs when firms face a soft budget constraint and managers are

able to borrow heavily, extract funds from the firm, and then default on the debt without penalty. They

employ a dataset with 1,017 observations from 392 companies spread nearly evenly between 1994 and

1996. Half of the firms are voucher-privatized joint stock companies (JSCs) while half are limited liability

companies (LLCs). Controlling for size, industry, capital intensity and initial leverage, they find that

voucher-privatized JSCs perform significantly worse than firms with concentrated ownership that had to

be purchased for cash. Investment fund-controlled JSCs under-perform all other firms, including other

JSCs, while fund-controlled JSCs also took on liabilities at a much faster rate than other firms, indicating

they were operating under a soft budget constraint. Though not able to measure the activity directly, they

conclude that the evidence indirectly shows that looting was a widespread occurrence for many JSCs.

2.5. Evidence on the Importance of Financial System Development in Promoting Economic Growth

In addition to dissatisfaction with the observed performance of state-owned banks, governments

have one additional and powerful reason to discard any financial sector development model that is shown

to be flawed. There is now little doubt that the financial sector in general, and banking in particular, plays

an important role in fostering the economic development of a nation. Rajan and Zingales (1998) provide

evidence supporting the positive influence of financial development on economic development by means

of reducing the cost of external financing to firms. They find that financial development is especially

important for the process of creating new firms in an economy.

Levine and Zervos (1998) also provide evidence suggesting that banking efficiency is critically

important to the development of an economy and that banking services are different from those provided

by stock markets. In fact, an entire stream of research has now emerged documenting the critical

importance of an efficient financial system to sustainable economic growth. Important recent papers in

this literature are Demirgüς-Kunt and Maksimovic (1996, 1998), Levine (1997), Demirgüç-Kunt and

Huizinga (1998), Wurgler (2000), Cetorelli and Gambera (2001) and Beck, Demirgüç-Kunt and Levine

(2003). Related papers stress the importance of creating the proper legal and regulatory framework for

encouraging the development of efficient, liquid banking and capital markets. This literature is largely

encompassed in a series of articles by La Porta and Lopez-de-Silanes (1999) and La Porta, Lopez-de-

Silanes, Shleifer, and Vishny (1997, 1998, 2002).

The basic themes that emerge from these research streams are that an efficient financial system is

vital, and that it is very difficult to construct from scratch or in place of existing (typically less effective)

systems, due to the determined opposition from entrenched parties. The most important source of

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opposition to development of a modern, non-politicized financial system is usually the state--and those

with close ties to the existing power structure. This fact makes banking privatization at least as important

as a tool of political economy as it is as a mechanism for banking reform.

2.4. How do Governments Select Banks to be Privatized?

Two studies examine the determinants of privatization choice—or which banks governments will

choose to sell and under what conditions. Clarke and Cull (2002) examine the political economy of sales

of thirteen banks by Argentine provincial governments after the passage of the April 1991 Convertibility

Act. They find that (1) poorly performing banks are more likely to be privatized than those performing

well; (2) overstaffing tends to reduce the probability of privatization because the post-sale staff cuts

needed will be too politically painful; (3) larger banks are less likely than smaller banks to be privatized;

(4) higher levels of provincial unemployment and higher shares of public employees reduces the

likelihood of privatization; and (5) the onset of the Tequila Crisis in 1995 increased the likelihood of

privatization by raising the financial costs of continued state bank subsidization. In other words, both

economic and political factors impact the privatization decision for individual banks, but political buyoffs

seemed especially important factors.

Boehmer, Nash and Netter (2003) use their comprehensive sample of bank privatizations from 51

countries to examine how political, institutional and economic factors relate to a country’s decision to

privatize its state owned banks. They specifically examine whether the determinants of banks

privatization are the same in OECD and non-OECD countries. They find that, in non-OECD economies,

bank privatization is more likely the lower the quality of the nation’s banking sector, the more right-wing

the government is, and the more accountable the government is to its people. None of these factors is

significant in developed economies; instead poor fiscal conditions are the most important determinants of

bank privatizations in OECD countries.

3. How do Governments Privatize State-Owned Banks?

The problems inherent in a state-owned banking industry have led many countries to at least

consider privatizing state-owned banks. Wherever and however banks are privatized, they all face a

common set of concerns and issues. These include: (1) the type of privatization process to utilize: asset

sale or public share offering; (2) whether and how to break up the government-owned banking systems,

especially the monobank systems of former socialist transition economies; (3) dealing with an extremely

low-quality loan portfolio, much of which is in default--albeit likely to be unrecognized on a financial

reporting basis; (4) ensuring an enhanced level of managerial talent in the system, and (5) ultimately

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attracting outside (often foreign) capital and expertise to the banking system. We examine the choice of

privatization method below, and then discuss the other issues governments face in subsequent sections.

3.1. Methods of Privatization

Governments usually choose one of three techniques to privatize: Asset sales, share-issue

privatizations, or voucher privatizations. With an asset sale, the government sells ownership of the state-

owned enterprise (SOE) to an existing private firm or to a small group of investors. This is similar to the

traditional use of the private capital market in non-SOE transactions. The government may sell a fraction

or all of the SOE through an asset sale. Typically, these asset sales are implemented through an auction,

although governments sometimes sell SOEs directly to private investors. Lopez-de-Silanes (1997) and La

Porta and Lopez-de-Silanes (1999) describe a very important national privatization program (Mexico) that

relied almost exclusively on asset sales, and Lopez-de-Silanes and Zamarippa (1995), Unal and Navarro

(1997), Gruben and McComb (1999) and Haber and Kantor (2003) show that Mexico’s banks were all

privatized using auctions (a form of asset sale) during the early 1990s.

In share-issue privatizations (SIPs), the privatizing government sells equity shares in the public

capital market both to retail and institutional investors. SIPs are the largest and most economically

significant of all privatizations, and account for the preponderance of the value of assets privatized

outside communist and formerly communist countries. Jones et al. (1999) report that through 1997,

governments in 59 countries raised over $446 billion through 630 SIP transactions. Bank privatizations in

OECD countries, and the very largest sales in developing countries, tend to be SIPs. For example, all of

the privatizations studied by Verbrugge, Megginson and Owens (1999) and Otchere (2003) are SIPs.

Formerly communist Eastern European nations such as Russia, Poland, and the Czech Republic

have primarily used voucher privatizations. Voucher privatizations are similar to SIPs, in that shares of

ownership are distributed broadly. However, in this method of privatization, the government distributes

vouchers (paper claims that are exchanged for ownership in previously state-owned firms) to each citizen.

These vouchers are usually free or very low in price and are available to most citizens. Thus, voucher

privatizations result in assets virtually being given to citizens. In a sense, they are SIPs offered at a very

low price. Bank privatizations using vouchers are examined in xxx.

3.2. The Record of Bank Privatizations

The empirical record suggests that no one form of sale is the “standard” or default method of

divesting state owned banks. The most comprehensive bank privatization study, that of Boehmer, Nash

and Netter (2003, hereafter BNN), examines 270 transactions from 51 countries over the period 1982-

2000, which raised a total of $119 billion for divesting governments. BNN find that 46.7 percent of these

13

sales are executed using SIPs, while the remaining 53.3 percent employ asset sales. The average (median)

transaction raises $442 million ($15 million) and involves the sale of 47.7 percent (41 percent) of the

bank’s total capital. This is but the first of many pieces of evidence suggesting that governments are very

hesitant to surrender effective control of the banks they are “privatizing,” much less divest them

completely.

Megginson (2004, Table 9.4) presents similar overall statistics regarding the bank privatizations

in his sample, which is reproduced here as Appendix 1. He documents that governments raised $142.9

billion through 144 public share offerings and 139 private sales between January 1987 and August 2003.

The SIPs raised $76.2 billion, an average of $529.1 million each, while the assets sales raised an average

of $479.9 million each, for a total of $66.7 billion. In almost every case, this represented a fundamental

break with a national past that emphasized the strategic role of commercial banking in funding the

nation’s economic development, and the national government’s key role in planning and directing that

development. The summary tables from BMN and Megginson are reproduced here as Table 4.

**** Insert Table 4 about here ****

4. Empirical Evidence on Banking Privatizations in Developed Countries

Unlike privatizations of non-financial firms, where a substantial body of significant literature and

empirical evidence has emerged, relatively few empirical analyses of bank privatizations have been

generated, and most of these have been published (or publicized) only very recently. This is somewhat

surprising since banks, or least the banking function, is indispensable in all economies. At the same time,

it is not unexpected since data on banks that have been privatized are so difficult to obtain, especially

regarding financial performance before and after privatization. Furthermore, banks have always been one

of the favorite tools of politicians and governments employ to channel funding to chosen sectors,

industries and firms on highly favorable terms. As such, they are even more opaque than usual for an

industry that under the best of circumstances suffers from lack of transparency in financial reporting.

Nonetheless, over two-dozen empirical studies of bank privatizations have been generated since

1998, and we survey these studies in this and the following two sections. This section discusses empirical

studies of bank privatizations in developed countries (defined as countries that were OECD members in

1990), while section 5 surveys studies of privatizations in non-transition developing countries and section

6 discusses empirical analyses of bank divestments in the transition economies of Central and Eastern

Europe (CEE) and the former Soviet Union. (FSU).

Four studies examine the effectiveness of bank privatization in OECD countries, and these are

summarized in Table 5. Two of these are multi-national studies, while the other two examine the

14

experience of individual countries. Verbrugge, Megginson and Owens (2000, hereafter VMO) study the

offering terms and share ownership results for 58 unseasoned (IPOs) and 34 seasoned offerings by 65

banks that were fully or partially privatized from 1981 to 1996. They then compare pre and post-

privatization performance changes for 32 banks in OECD countries and five in developing countries.

VMO document moderate performance improvements in OECD countries; ratios proxying for

profitability, fee income (non-interest income as fraction of total), and capital adequacy increase

significantly, while leverage ratio declines significantly. They also find significantly positive initial

returns to IPO investors On the other hand, VMO document large, ongoing state ownership, with very

few governments selling majority control of their banks—and even fewer selling their entire ownership

stake.

**** Insert Table 5 about here ****

Gleason, McNulty and Pennathur (2003) examine the short and long-term stock returns to

successful bidding firms that participate in the purchase of a financial service firm being privatized. They

study bidders that are US-based or have stock traded in a US market and examine 86 transactions from

1980 through 2002, though most sales occur between 1995 and 1998. They find that the cumulative

abnormal returns (CARs) to bidding firm shareholders is positive around the date of the announcement,

but that this short-run superior performance is not sustainable over longer periods. While the long-run

CARs are (insignificantly) negative, the authors find that bank bidders are able to significantly reduce

their systematic risks, relative to the home market, following such acquisitions.

Braz (1999) examines the nationalization of Portugal’s private banking system following a

military coup in 1974, as well as the “re-privatization” of these same banks after 1990. He describes the

(multiple) objectives of the Portuguese government in launching this bank privatization program, and also

discusses the primary method of sale (public offer) and offer terms of these divestitures. Drawing on both

his own analyses and other published work, Braz shows that (1) the productive efficiency of privatized

banks increased significantly after divestiture, with assets per worker showing an especially large

differential increase; (2) privatized banks reduced staff at a significantly more rapid rate than did public

banks; and (3) privatized banks experienced significantly more rapid growth in their branch networks than

did state banks. He concludes by offering several “lessons” for government officials weighing the

privatization of their nation’s banking system.

Finally, Otchere and Chan (2003) perform a clinical analysis (case study) of the impact that

Commonwealth Bank of Australia’s (CBA’s) privatization had on the bank itself as well as on its

domestic rivals. The initial sale of CBA was executed in 1991, and the bank was fully divested in 1996.

They find that (1) the stock prices of major rival banks reacted negatively to CBA’s sales, with especially

15

negative reactions to the initial and final sales; (2) CBA’s long-run stock price performance is

significantly positive, and increases steadily as the government’s ownership stake declines; (3) the

financial and operating performance of CBA improves significantly after privatization, and surpasses that

of its major rivals.

In sum, the evidence from developed countries is that bank privatization yields significant

performance improvements, though these seem to be smaller and less pervasive than the improvements

typically documented in studies of non-financial company privatizations in OECD countries. We now

assess the privatization experiences of non-OECD countries.

5. Empirical Evidence on Banking Privatizations in Non-Transition, Developing Countries

Several papers describe bank privatizations in non-transition developing countries, though only

three of these actually perform empirical analyses of privatization’s impact. These three are summarized

in table 6. Two of these are multi-national studies, while the third examines the national experience of

Nigeria. Boubakri, Cosset, Fischer and Guedhami (2003) examine the post-privatization performance of

81 banks divested in whole or (much more frequently) in part by governments of 22 developing countries

over the period 1986-1998. They find that (1) privatization alone does not seem to significantly impact

profitability or operating efficiency; (2) ownership type and industry concentration significantly impacts

risk taking behavior by privatized banks, with banks controlled by industrial groups taking the highest

risk exposure, followed by locally controlled banks and with foreign owned banks taking the least

exposure; (3) foreign owned banks have lower net interest margins than do locally owned banks,

suggesting that foreign ownership makes a significantly greater contributions to a divested bank’s

economic efficiency.

**** Insert Table 6 about here ****

The second multi-national study, Otchere (2003), performs a similar pre- versus post-

privatization analysis of operating performance changes, as well as an assessment of stock price

performance, for 21 banks privatizations (18 unseasoned and three seasoned offerings) in low and middle

income countries from 1989 to 1997. He also computes the same measures for 28 rival firms for

comparison purposes. He finds that privatization announcements elicit significantly negative stock price

reactions from rival banks, which are more negative the larger the state ownership fraction that is

divested. These findings support the “competitive effects” hypothesis and suggest that investors view

privatization announcements as foreshadowing bad news for rival banks. On the other hand, Otchere finds

that the privatized bank stocks significantly under-perform their respective stock markets, and these

16

returns are also (insignificantly) lower than those achieved by rival bank stocks. He also finds little

evidence of significant improvements in the operating performance of privatized banks.

The third empirical study, Beck, Cull and Jerome (2003), examines the effect of privatization on

performance using an unbalanced panel of 69 banks with annual data for the period 1990-2001. The

authors focus on the nine banks that were completely privatized during this period. They document a

significantly positive impact from privatization, even in a macroeconomic and regulatory environment

that was inhospitable to financial intermediation. Privatization helped close the very wide gap between

the performance of state-owned banks and private banks in Nigeria, though the performance of divested

firms never surpassed that of private banks.

In addition to these three empirical studies, there are numerous descriptive analyses of bank

privatization programs in developing countries, particularly in Latin America. Clarke and Cull (2003)

develop a simple theory that models the inherent tradeoffs between sales price offered, layoffs allowed

and loan portfolios guaranteed faced by governments and potential buyers in privatization transactions

involving banks. They then test this model using data drawn from 15 provincial Argentine bank

privatizations during the 1990s. They find that provinces with high fiscal deficits were willing to accept

layoffs and to guarantee a larger fraction of the privatized bank’s portfolio in return for a higher price.

The Tequila Crisis also forced politicians to protect fewer jobs and retain a higher share of public banks’

assets in a residual entity.

Baer and Nazmi (2000) describe the origins of Brazil’s state and private banks and examines how

the decades of inflation produced distortions in how they functioned. They then describe how the Real

Plan’s success in halting inflation--which was good for the overall economy—severely impacted the

profitability (even the viability) of both state and private banks in Brazil and led the state and national

governments to take increasingly desperate steps to rescue the banking system from collapse. Ness (2000)

and Makler (2000) present similar discussions of the Brazilian banking system’s evolution and outlook.

Brock (1999) describes and examines Chile’s two bank privatization programs. The first program

was implemented in 1975, soon after the Allende government was overthrown, and used highly leveraged

direct sales—primarily to the banks’ previous owners. This program ended in failure after the Debt Crisis

broke out in 1982, when the Central Bank was forced to close or renationalize most of the privatized

banks. The second, and much more successful, program began in 1985 and employed mostly public share

offerings targeted at small investors and offered on very favorable terms. Brock describes the difficulties

faced by the Chilean government, and especially the Central Bank, in re-capitalizing and then re-

privatizing the nation’s banks and other financial institutions, though these efforts were ultimately far

more successful than those in other Lartin American countries.

17

Four studies--Lopez-de-Silanes and Zamarippa (1995), Unal and Navarro (1997), Gruben and

McComb (1999) and Haber and Kantor (2003)--examine Mexico’s highly controversial bank

privatization program, which began in 1991and ended five years later in default and collapse. All of the

authors show that the Mexican government, which had first seized all private banking assets in a foolish

nationalization in 1982, deliberately structured the 1991 privatization sales to maximize the proceeds

received by the national treasury, regardless of buyer competency or the need to promote sound banking

practices. The government implicitly promised to allow the new owners to achieve high profits by

protecting domestic banks from competition, by allowing the newly private banks to use very forgiving

accounting rules, and by practicing an extreme form of regulatory forbearance. The resulting boom in

domestic borrowing masked fundamental flaws in the banking system created by this privatization

program, and the system collapsed completely after the disastrous December 1994 devaluation of the

Mexican peso. The banking system then had to be re-capitalized at great cost to Mexico’s taxpayers, and

by 2001 foreign banks controlled over 60 percent of the country’s banking assets.

All in all, the empirical record on banking privatization in non-transition developing countries

does not offer overwhelming support for the idea that privatization alone can improve the (usually

dreadful) financial and operating performance of state-owned banks. Simply selling off state banks seems

to yield only negligible improvement, and poorly designed privatizations (i.e., Mexico’s) can backfire

badly. On the other hand, empirical evidence also shows that leaving banks under public ownership is an

even worse strategy, given the state’s dismal fiduciary record. We now conclude our assessment of bank

privatization’s empirical record by examining how these sales have worked in the transition economies of

Central and Eastern Europe and the former Soviet Union.

5. Empirical Evidence on Banking Privatizations in Transition Countries

Bank privatizations in CEE and FSU economies differ significantly from bank sales elsewhere in

two important respects. First, these sales involved a transformation from a socialist command economy,

in which banks played a central coordinating and credit-rationing mode, to a market economy in which

banks are expected to have vastly different functions. Second, many banks were sold through voucher

privatizations. Ensuring a smooth shift from state-owned banks to private banks is difficult even in mixed

capitalistic systems where only a few sectors, like banking, may have been nationalized. Smooth shifts in

the banking sector in economies that are virtually completely state-owned (transition economics) are

devilishly difficult.

A number of theoretical and empirical papers outline the special difficulties encountered by banks

in transition economies. Perotti (1993) shows theoretically that banks in these countries have a strong,

18

perverse incentive to fund large former debtors, although these state-owned enterprises (SOEs) are less

efficient and more risky than private firms, because by doing so they gain the potential repayment of

previous debts. This inevitably leads to lower productivity of investment and a greater concentration of

risk. Furthermore, since privately owned banks feel this incentive just as strongly as state-owned ones,

merely privatizing the banking industry will not solve the problem. The incentive to subsidize former

debtors is, however, magnified in the all-too-frequent case where the state retains significant influence

over the banks or the debtor companies (or both) after these are nominally privatized. Perotti concludes

that liquidation of economically hopeless SOEs will generally be preferable to eternal subsidization, since

this will both recognize the true value of the debt and remove the “debt overhang” from banks so they can

increase their lending to the more dynamic private sector.

Saunders and Sommariva (1993) analyze the difficulties of transitioning from state control to a

market system with specific reference to Eastern Europe. They investigate alternative approaches for

restructuring troubled commercial banks. Beginning with a pure bankruptcy approach, which they reject

as a viable alternative, they address various restructuring approaches including recapitalization, “loan

hospitals” (bad bank approach), and various types of debt-for-debt and equity-for-debt exchange. They

also discuss the use of some of the approaches used in other countries, like the RTC for the savings and

loan debacle in the United States. Their analysis demonstrates clearly the difficulty of managing and

dealing with only one problem in the bank privatization process, namely the troubled loan issue in the

monobank systems.

Bonin and Wachtel (1998) provide an excellent analysis of the difficulties of achieving market-

based banking systems in transition economies. They emphasize that bank privatization is only one step

in the always painful process of disengaging the state from virtually complete control over the banking

system. In a later study, Bonin and Wachtel (2002), these same authors examine the structure of the

banking sectors of six transition countries in which privatization of state-owned banks is well advanced.

Their most striking finding is that foreign banks now dominate banking in Hungary, Poland, the Czech

republic, Croatia and Bulgaria—and are making substantial inroads in Romania. The rise of foreign bank

ownership is at least partly a result of the essential failure of domestic ownership to satisfactorily address

the financial problems of borrowers (especially SOEs) in transition countries or to impose hard budget

constraints that would force these firms to restructure. Commander, Dutz and Stern (1999) show that this

failure to restructure had an especially woeful impact on the post-privatization performance of firms in all

transition economies, but particularly the former Soviet republics.

Meyendorff and Snyder (1997) study the “transactional structures” of banking privatizations in

Central and Eastern Europe, which they define as having three elements: (1) antecedent actions that

determine the characteristics of the unit being privatized; (2) ownership transfer and governance after

19

privatization; and (3) follow-on actions and ongoing government intervention. They note that most of the

governments in the region made similar policy choices when they began privatizing their banking

systems, which have proven highly influential over time. As examples, most governments chose not to

seriously break up the socialist monobank system, and most severely restricted new competition—

particularly from foreign banks. For these reasons, the former monobanks retain dominant market shares

in most of the transition economies almost a decade after reforms were initiated. Further, none of the

politically feasible ownership transfer methods (voucher privatization, insider sales) brought in new

capital or talent, so all the region’s banking systems remain weak and noncompetitive. The prospect of

EU membership in the foreseeable future does, however, offer some hope that true restructuring might

begin soon.

The same special issue of the Journal of Comparative Economics in which Meyendorff and

Snyder’s paper appears also presents three case studies of specific bank privatizations in transition

economies. Abarbanell and Bonin (1997) study the 1993 privatization of Poland’s Bank Slaski in a mixed

asset sale (to ING) and public offering. They suggest that this experience show the benefits of attracting a

strategic foreign investor, but also highlight the drawbacks of pursuing this strategy too obsessively.

Abarbanell and Meyendorff (1997) describe Russia’s disbanding of Zhilotsotsbank and the subsequent

creation of its private successor, Mosbusinessbank, in a way that left incumbent mangers largely in

control of the bank’s strategy and operations. They describe how the Russian government’s bank

privatization and deregulation policies have engendered a system that is 75 percent private and

surprisingly innovative—but also highly unstable. Finally, Snyder and Kormendi (1997) describe the

1992 voucher privatization of Komercni Banka, the Czech Republic’s largest bank, in a way that left the

state in effective control of the company’s operating and lending policies. These authors show that this

decision to pass up an opportunity to create a strong private bank and to harden budget constraints for

borrowers was to have lasting, negative consequences for the bank and the nation.

In sum, the evidence from transition economies is somewhat more favorable regarding the impact

of privatization on bank performance than was the case for non-transition developing countries. The

natural temptation for governments in all the transition economies was to retain effective control of banks

after other non-financial firms had been divested in order to lessen the shock of transition by propping up

borrowers with easy credits. This is exactly what the state overseers did in virtually all cases where they

retained control (or even influence), and the results were invariably disastrous for the banks, the

government and the nation’s taxpayers. After repeated “one-time” re-capitalizations, governments

throughout the region finally ceded control entirely to private owners, who more often than not were

foreign. By 2002, foreign banks controlled the banking system of the largest CEE economies, though

they had not yet had the same impact in FSU countries.

20

6. Lessons Learned from Studies of Bank Privatization—and Unresolved Issues

The body of evidence discussed above allows us to draw conclusions, but also leaves several

issues unresolved. One key item is the fact that many bank privatization programs result in virtually

complete foreign ownership of banking systems, particularly in developing and transition. We begin this

concluding section with a systematic assessment of the evidence regarding the efficacy of foreign

ownership of banking assets.

6.1. Empirical Evidence on the Impact and Efficiency of Foreign Ownership of Banks

It is not too much of an exaggeration to state that the expected final outcome of bank

privatizations—especially flawed privatizations— in developing countries is foreign ownership and

domination of a country’s banking system. Several studies examine the impact of foreign ownership of

banks, and these studies are summarized in Table 7. Claessens, Demirgüç-Kunt and Huizinga (1998)

examine the extent of foreign ownership in 80 national markets over the 1988-1995 period, and test

whether net interest margins, costs, taxes paid, and profitability are different between domestic and

foreign-owned banks. They find that foreign banks achieve higher profits than domestic banks in

developing countries, but exactly the opposite in developed markets. Regression results also suggest that

an increase in foreign bank share leads to lower profitability for domestic banks.

**** Insert Table 7 about here ****

Clarke, Cull and Martinez Peria (2001) use survey data from over 4,000 borrowers in 38

developing and transition countries during 1999 to examine whether foreign bank penetration reduces

access to credit in developing countries. Their empirical results strongly support the assertion that foreign

bank penetration improves firms’ access to credit. Borrowers in countries with high levels of foreign bank

penetration tend to rate interest rates and access to long-term loans as lesser constraints on enterprise

operations and growth than enterprises in countries with foreign penetration. The authors also find that the

benefits of enhanced credit availability apply to small and medium sized businesses as well as large ones.

Majnoni, Shankar and Várheggi (2003) study the dynamics of foreign bank ownership in

Hungary using a sample of 26 commercial banks active in the period 1994 to 2000. By the end of the year

2000, foreign controlled banks accounted for over two-thirds of total banking assets in Hungary. They

find that, after controlling for the nature of investment (greenfield versus acquisition), management style

and duration of ownership, foreign banks are pursuing a lending policy that does not differ significantly

from domestic banks. Foreign banks are, however, able to achieve consistently higher profitability levels.

21

In addition to the empirical studies discussed above, Clarke, Cull Martinez Peria and Sánchez

(2001) survey the extant evidence on foreign bank entry in developing countries, while Berger (2003)

performs a similar survey that also includes developed economies. Clarke, et al. show that foreign

ownership increased substantially in many developing countries between 1994 and 1999, and exceeded 30

percent of all banking assets in Peru, Venezuela, Argentina, the Czech Republic, Poland, Chile and

Hungary in 1999. In sum, the evidence clearly suggests that foreign bank ownership is efficiency

enhancing—at least in developing countries—and may well be the default outcome for many national

bank privatization programs.

6.2. Summary and Conclusions

This preliminary draft does not yet contain a full summary of the lessons that can be drawn from

the empirical record of banking privatization. Instead, the author re-asserts the conclusions presented in

Verbrugge, Megginson and Owens (1999). In that study, we conclude that there are a series of very

important issues and questions that must be addressed in order for bank privatization to be successful.

Some, if not most, of these issues do not come into the equation in non-financial privatizations. For bank

privatization to be successful in any country, a set of conditions must be achieved that ensure the greatest

likelihood for the establishment of a viable banking system. We suggest that the following conditions

represent the minimum conditions for achieving this goal.

• A deposit insurance system must be established that does not create serious moral hazard

problems (for example, 100% deposit insurance is not a wise system).

• A bank regulatory system must be developed that is sufficiently independent from political

influence. This is essential for effective bank examination, supervision and monitoring.

• Governance systems must be instituted where truly independent shareholders control the bank,

have incentives to modernize its systems, and establish policies that orient bank decision-making

toward creating value for shareholders.

• Financial reporting systems must be developed that allow for transparency, especially with regard

to asset quality and true profitability.

• Effective methods of dealing with bad loans prior to and/or during the privatization process are

essential. This problem is especially severe in situations where uncollectable loans are

outstanding to state-owned enterprises (SOEs).

• It is essential to eliminate the culture and propensity of banks to lend to these SOEs after

privatization is critical, especially in economies with large remaining concentrations of SOEs, and

in transition economies

22

• There must be assurances that if the government does retain partial ownership, it acts only as a

passive investor. This is essential to prevent the continuation of past credit-allocation decisions

made by the government, usually on some political or central-planning basis.

• The influence of insider control over bank policies and decisions must be reduced, since these

individuals were likely responsible for past decisions that may have led to the problems. This

may require a complete change in management.

• Finally, and perhaps most controversially, governments may well need to emphasize sales to

foreign owners—particularly foreign commercial banks—in order to attract badly-needed capital,

expertise, technology, and financial legitimacy.

Bank privatizations are among the biggest challenges facing many governments around the

world. The reluctance of states to remove themselves from the banking and credit systems is well

documented. However, if the objective of a country is to establish a more efficient and market-oriented

economy, reducing the influence of the state on credit allocation decisions is critically important.

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Makler, Harry M. 2000. “Bank Transformation and Privatization in Brazil: Financial Federalism and

Some Lessons about Bank Privatization,” Quarterly Review of Economics and Finance 40, pp. 45-69.

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Operating Performance of Newly Privatized Firms: An International Empirical Analysis,” Journal of Finance 49, pp. 403-452.

Megginson, William L. and Jeffry M. Netter. 2001. “From State to Market: A Survey of Empirical

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26

Ness, Walter L., Jr. 2000. “Reducing Government Bank Presence in the Brazilian Financial System,”

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58, pp. 187-214.

27

Table 1: Banking System Details and State Ownership Levels, 1999

Country Percent of total bank assets state owned

Percent of total bank assets

foreign owned

Percent of deposits held by 5

largest banks

Total bank assets / GDP

(percent)

Explicit deposit insurance

scheme Australia 0 17 73 No Bahrain 4 28 71 186 Yes Bangladesh 70 6 65 Yes Canada 0 76 154 Yes Cyprus 3 11 80 76 Yes India 80 0 42 48 Yes Ireland Yes Israel 80 147 No Kenya 62 56 Yes Malaysia 0 18 30 166 No New Zealand 0 99 91 154 No Nigeria 13 0 51 28 Yes Saudi Arabia 0 69 93 No Singapore 0 50 No South Africa 0 5 85 90 No Sri Lanka 55 No Thailand 31 7 75 117 No Trinidad and Tobago 15 8 75 Yes United Kingdom 0 311 Yes United States 0 5 21 66 Yes English origin average 15.94 19.54 65.37 120.86 English origin median 0 8 72 105 Argentina 30 49 48 54 Yes Belgium 74 315 Yes Bolivia 0 42 68 52 No Brazil 52 17 58 55 Yes Chile 12 32 59 97 Yes Egypt 67 4 65 No El Salvador 7 13 75 62 Yes France 0 70 147 Yes Greece 13 5 70 100 Yes Guatemala 8 5 38 28 Yes Honduras 1 2 52 Yes Indonesia 44 7 53 101 Yes Italy 17 5 25 150 Yes Jordan 0 68 68 214 No Kuwait 0 0 109 No Lebanon 0 27 40 Yes Mexico 25 20 80 30 Yes Morocco 24 19 75 89 Yes Netherlands 6 88 358 Yes Oman 0 11 77 64 Yes Panama 12 38 30 386 No Peru 3 40 81 36 Yes Philippines 12 13 46 91 No Portugal 21 12 82 238 Yes Qatar 43 15 76 No Spain 0 11 49 156 Yes Turkey 35 66 50 Yes

28

Venezuela 5 34 64 6 Yes French origin average 16.18 22.2 61.52 127.74 French origin median 12 15 65 97 Austria 4 5 38 Yes Germany 42 4 12 313 Yes Japan 1 6 31 Yes Switzerland 15 9 65 539 Yes Taiwan 43 15 No German origin average 21 6 32.2 426 German origin median 15 5.5 31 426 Denmark 0 79 121 Yes Finland 22 8 97 Yes Iceland 64 0 Yes Sweden 0 2 129 Yes Scandinavian origin average

21.5 3.33 88 125

Scandinavian origin median

11 2 88 125

China 75 No Croatia 37 7 57 Yes Czech Republic 19 26 74 125 Yes Hungary 3 62 Yes Poland 44 26 57 54 Yes Romania 70 8 59 25 Yes Russia 68 9 80 16 No Slovenia 40 5 64 66 No Vietnam 65 No Socialist origin average 40.14 20.43 66.37 57.2 Socialist origin median 40 9 64.5 54 Average with socialist 19.67 18.96 61.64 130.83 Average without socialist

16.96 18.73 60.88 139.80

Median with socialist 12 11 65 98.5 Median without socialist 7 11 66.5 101

Source: Table 1 in James R. Barth, G.Caprio and Ross Levine. 2001. “The Regulation and Supervision of Banks Around the World,” in Robert E. Litan and Richard Herring (Eds.), Integrating Emerging Market Countries Into the Global Financial System, Brookin-Wharton Papers on Financial Services (Brookings Institution Press, 2001), pp. 183-240.

29

Tab

le 2

: Su

mm

ary

of E

mpi

rica

l Stu

dies

on

Stat

e ve

rsus

Pri

vate

Ow

ners

hip

of B

anki

ng

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

---

St

udy

Sam

ple

desc

ript

ion,

stu

dy p

erio

d, a

nd m

etho

dolo

gy

Sum

mar

y of

em

piri

cal f

indi

ngs

and

conc

lusi

ons

Bha

ttach

arya

, L

ovel

l and

Sah

ay

(199

7)

Em

ploy

dat

a en

velo

pe a

naly

sis

to e

xam

ine

the

rela

tive

effi

cien

cy o

f 70

sta

te-,

for

eign

- an

d pr

ivat

ely-

owne

d ba

nks

in I

ndia

dur

ing

the

earl

y st

ages

(19

86-1

991)

of

libe

rali

zati

on.

Find

that

, dur

ing

the

stud

y pe

riod

, pub

licly

-ow

ned

bank

s ar

e th

e m

ost e

ffic

ient

and

pri

vate

ly-o

wne

d ba

nks

the

leas

t eff

icie

nt a

t de

liver

ing

fina

ncia

l ser

vice

s to

cus

tom

ers.

How

ever

, the

y al

so f

ind

that

for

eign

-ow

ned

bank

s in

crea

se m

arke

t sha

re s

igni

fica

ntly

dur

ing

this

per

iod,

pri

mar

ily

at th

e ex

pens

e of

sta

te b

anks

.

LaP

orta

, Lop

ez-

de-S

ilan

es,

Shle

ifer

(20

02)

Usi

ng d

ata

from

92

coun

trie

s, th

ey e

xam

ine

whe

ther

go

vern

men

t ow

ners

hip

of b

anks

impa

cts

the

leve

l of

fina

ncia

l sys

tem

dev

elop

men

t, ra

te o

f ec

onom

ic g

row

th,

and

grow

th r

ate

of p

rodu

ctiv

ity.

The

y te

st w

heth

er

gove

rnm

ent o

wne

rshi

p of

ban

ks is

mot

ivat

ed b

y be

nevo

lent

, “de

velo

pmen

t” o

bjec

tives

or

by r

edis

trib

utiv

e “p

oliti

cal”

obj

ectiv

es

The

y fi

nd th

at g

over

nmen

t ow

ners

hip

is e

xten

sive

, esp

ecia

lly in

the

poor

est c

ount

ries

. The

y al

so f

ind

that

thes

e ho

ldin

gs r

etar

d fi

nanc

ial

syst

em d

evel

opm

ent a

nd r

estr

ict e

cono

mic

gro

wth

rat

es, m

ostl

y du

e to

the

impa

ct o

f st

ate

owne

rshi

p—an

d th

e m

onop

oly

pow

er

freq

uent

ly a

ttend

ant t

here

to--

on p

rodu

ctiv

ity.

Hig

her

gove

rnm

ent

owne

rshi

p in

197

0 is

ass

ocia

ted

wit

h si

gnif

ican

tly

slow

er

subs

eque

nt f

inan

cial

dev

elop

men

t and

low

er g

row

th in

per

cap

ita

inco

me

and

prod

ucti

vity

. Thi

s ev

iden

ce s

uppo

rts

the

polit

ical

vie

w

of s

tate

ow

ners

hip

of b

anks

.

Bon

in, H

asan

an

d Pa

ul W

acht

el

(200

2)

Exa

min

e th

e im

pact

of

owne

rshi

p st

ruct

ure

(sta

te, p

riva

te

and

fore

ign

owne

rshi

p) o

n ba

nk p

erfo

rman

ce in

the

six

tran

sitio

n ec

onom

ies

of B

ulga

ria,

Cro

atia

, the

Cze

ch

Rep

ublic

, Hun

gary

, Pol

and

and

Rom

ania

. The

ir s

ampl

e ha

s 22

2 ob

serv

atio

ns w

ith f

inan

cial

and

ow

ners

hip

data

fr

om th

ese

six

coun

trie

s fo

r th

e ye

ars

1999

and

200

0.

The

aut

hors

fin

d ro

bust

evi

denc

e th

at p

rofi

tabi

lity—

mea

sure

d by

re

turn

on

asse

ts a

nd r

etur

n on

equ

ity-

-is

high

er f

or f

ully

pri

vate

ba

nks

than

for

ban

ks w

ith s

ome

stat

e ow

ners

hip,

and

is th

e hi

ghes

t of

all

for

who

lly f

orei

gn-o

wne

d ba

nks.

For

eign

ban

ks a

lso

expe

rien

ce th

e m

ost r

apid

incr

ease

in c

usto

mer

loan

s.

Bar

th, C

apri

o an

d L

evin

e (2

003)

Use

a n

ew d

atab

ase

on b

ank

regu

lati

on a

nd s

uper

visi

on in

10

7 co

untr

ies

to a

sses

s th

e re

latio

nshi

p be

twee

n sp

ecif

ic

regu

lato

ry a

nd s

uper

viso

ry p

ract

ices

and

ban

king

-sec

tor

deve

lopm

ent,

effi

cien

cy, a

nd f

ragi

lity.

The

y al

so e

xam

ine

the

rela

tions

hip

betw

een

stat

e ow

ners

hip

and

thes

e m

easu

res

of b

anki

ng-s

ecto

r de

velo

pmen

t.

The

y fi

nd th

at g

over

nmen

t ow

ners

hip

of b

anks

is n

egat

ivel

y co

rrel

ated

with

fav

orab

le b

anki

ng o

utco

mes

and

pos

itive

ly li

nked

w

ith

corr

uptio

n. H

owev

er, g

over

nmen

t ow

ners

hip

does

not

ret

ain

an

inde

pend

ent,

robu

st a

ssoc

iati

on w

ith

bank

dev

elop

men

t, ef

fici

ency

or

sta

bilit

y w

hen

othe

r fe

atur

es o

f th

e re

gula

tory

and

sup

ervi

sory

en

viro

nmen

t are

con

trol

led

for.

Sapi

enza

(20

03)

Stud

ies

the

effe

cts

of g

over

nmen

t ow

ners

hip

on b

ank

lend

ing

beha

vior

usi

ng in

form

atio

n on

indi

vidu

al lo

an

cont

ract

s be

twee

n It

alia

n ba

nks

and

cust

omer

s ov

er th

e pe

riod

199

1 to

199

5. H

e em

ploy

s a

mat

ched

set

of

110,

786

com

pany

-ban

k-ye

ar o

bser

vatio

ns o

f lin

es o

f cr

edit

ext

ende

d to

6,9

68 c

ompa

nies

. 55,

393

obse

rvat

ions

Find

s th

at b

orro

wer

s fr

om s

tate

-ow

ned

bank

s pa

y an

ave

rage

of

44 b

asis

po

ints

less

than

do

borr

ower

s fr

om p

riva

te b

anks

. He

also

sho

ws

that

the

votin

g pa

ttern

of

the

regi

on w

here

the

loan

is b

ooke

d an

d th

e pa

rty

of th

e st

ate

bank

’s C

EO

sig

nifi

cant

ly in

flue

nce

the

pric

e of

loan

s. T

hese

res

ults

st

rong

ly s

uppo

rt th

e po

liti

cal v

iew

of

stat

e ba

nk o

wne

rshi

p ov

er th

e co

mpe

ting

soc

ial a

nd a

genc

y co

st v

iew

s.

30

cred

it e

xten

ded

to 6

,968

com

pani

es. 5

5,39

3 ob

serv

atio

ns

refe

r to

bor

row

ers

from

sta

te-o

wne

d ba

nks

and

55,3

93

refe

r to

bor

row

ers

from

pri

vate

ly o

wne

d ba

nks.

Cor

nette

, Guo

, K

haks

ari a

nd

Teh

rani

an (

2003

)

Exa

min

e pe

rfor

man

ce d

iffe

renc

es b

etw

een

priv

atel

y-ow

ned

and

stat

e-ow

ned

bank

s in

six

teen

Far

Eas

t co

untr

ies

from

198

9 th

roug

h 19

98.

The

y fi

nd th

at s

tate

-ow

ned

bank

s ar

e si

gnif

ican

tly le

ss p

rofi

tabl

e th

an p

riva

tely

ow

ned

bank

s du

e to

sta

te b

anks

’ lo

wer

cap

ital r

atio

s,

grea

ter

cred

it ri

sk, l

ower

liqu

idity

and

low

er m

anag

emen

t eff

icie

ncy.

W

hile

the

perf

orm

ance

of

all b

anks

det

erio

rate

d si

gnif

ican

tly a

t the

be

ginn

ing

of th

e A

sian

eco

nom

ic c

risi

s in

199

7 an

d 19

98, s

tate

ba

nks’

per

form

ance

det

erio

rate

d m

ore

than

did

that

of

priv

ate

bank

s an

d pe

rfor

man

ce d

iffe

renc

es a

re m

ost a

cute

in th

ose

coun

trie

s w

here

go

vern

men

t inv

olve

men

t in

the

bank

ing

syst

em is

the

grea

test

.

31

Tab

le 3

: Su

mm

ary

of E

mpi

rica

l Stu

dies

Exa

min

ing

The

Im

port

ance

of

Soft

Bud

get

Con

stra

ints

(SB

Cs)

and

Whe

ther

the

Impo

siti

on o

f H

ard

Bud

get

Con

stra

ints

(HB

C) I

mpr

oves

Cor

pora

te P

erfo

rman

ce

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

---

St

udy

Sam

ple

desc

ript

ion,

stu

dy p

erio

d, a

nd m

etho

dolo

gy

Sum

mar

y of

em

piri

cal f

indi

ngs

and

conc

lusi

ons

Fryd

man

, G

ray,

Hes

sel

and

Rap

aczy

nski

(2

000)

Exa

min

es w

heth

er th

e im

posi

tion

of

hard

bud

get

cons

trai

nts

is a

lone

suf

fici

ent t

o im

prov

e co

rpor

ate

perf

orm

ance

in th

e C

zech

Rep

ublic

, Hun

gary

and

Pol

and.

E

mpl

oys

a sa

mpl

e of

216

fir

ms,

spl

it be

twee

n st

ate-

owne

d (3

1%),

pri

vatiz

ed (

43%

), a

nd p

riva

te (

26%

) fi

rms.

Find

s pr

ivat

izat

ion

alon

e ad

ded

near

ly 1

0 pe

rcen

tage

poi

nts

to th

e re

venu

e gr

owth

of

a fi

rm s

old

to o

utsi

de o

wne

rs. M

ost i

mpo

rtan

t, fi

nds

that

the

thre

at o

f ha

rd b

udge

t con

stra

ints

for

poo

rly

perf

orm

ing

SOE

s fa

lters

, sin

ce g

over

nmen

ts a

re u

nwill

ing

to

allo

w th

ese

firm

s to

fai

l. T

he b

runt

of

SOE

s’ lo

wer

cr

edit

wor

thin

ess

falls

on

stat

e cr

edito

rs. P

riva

tiza

tion

requ

ired

to

impr

ove

perf

orm

ance

; thr

eat o

f H

BC

not

cre

dibl

e.

Ber

tero

and

R

ondi

(20

00)

Em

ploy

ing

a sa

mpl

e of

150

Ita

lian

man

ufac

turi

ng S

OE

S,

wit

h 1,

278

firm

-yea

r ob

serv

atio

ns, e

xam

ine

whe

ther

im

posi

tion

of a

har

d bu

dget

con

stra

int c

an im

prov

e SO

E

perf

orm

ance

. Exp

loit

s th

e fa

ct th

at f

isca

l env

iron

men

t be

cam

e m

uch

tigh

ter

for

Ital

ian

stat

e en

terp

rise

s du

ring

th

e la

te 1

980s

.

Find

that

the

SOE

fir

ms’

res

pons

e to

incr

ease

d de

bt d

urin

g th

e ar

d bu

dget

con

stra

int p

erio

d, 1

988-

93, w

as c

onsi

sten

t with

fin

anci

al

pres

sure

, but

was

not

dur

ing

the

soft

bud

get c

onst

rain

t per

iod

of

1977

-87.

Onl

y du

ring

the

late

r pe

riod

do

firm

s re

spon

d to

fi

nanc

ial p

ress

ure

by in

crea

sing

TFP

and

red

ucin

g em

ploy

men

t. Im

posi

tion

of H

BC

impr

oves

per

form

ance

with

out o

wne

rshi

p ch

ange

. L

izal

and

Sv

ejna

r (2

001)

E

xam

ine

stra

tegi

c re

stru

ctur

ing

and

new

inve

stm

ent

perf

orm

ance

of

4,00

0 C

zech

com

pani

es d

urin

g 19

92-9

8.

Dat

aset

incl

udes

ove

r 83

,000

qua

rter

ly o

bser

vatio

ns.

Dev

elop

and

test

a d

ynam

ic m

odel

of

rest

ruct

urin

g an

d in

vest

men

t, al

low

ing

them

to e

xam

ine

sepa

rabl

e im

pact

of

priv

ate

vers

us p

ublic

and

dom

esti

c ve

rsus

for

eign

ow

ners

hip

on r

estr

uctu

ring

, as

wel

l as

the

impo

rtan

ce o

f ac

cess

to c

redi

t and

a s

oft b

udge

t con

stra

int o

n fi

rm

inve

stm

ent

Find

that

(1)

for

eign

ow

ned

com

pani

es in

vest

the

mos

t and

(d

omes

tica

lly o

wne

d) c

oope

rati

ves

the

leas

t; (2

) pr

ivat

e fi

rms

do

not i

nves

t mor

e th

an s

tate

-ow

ned

firm

s; (

30 c

oope

rati

ves

and

smal

l fir

ms

are

cred

it ra

tione

d; a

nd (

4) S

OE

s op

erat

e un

der

a so

ft

budg

et c

onst

rain

t

Cor

icel

li a

nd

Dja

nkov

(2

001)

Iden

tify

the

pres

ence

of

soft

bud

get c

onst

rain

ts a

nd

anal

yze

thei

r im

pact

on

ente

rpri

se r

estr

uctu

ring

in

Rom

ania

dur

ing

the

initi

al tr

ansi

tion

peri

od. E

mpl

oy a

si

mpl

e an

alyt

ical

mod

el a

nd a

sam

ple

of 4

,429

ent

erpr

ises

w

ith

data

fro

m 1

992-

95 to

test

whe

ther

har

deni

ng b

udge

t co

nstr

aint

s pr

omot

es b

enef

icia

l res

truc

turi

ng a

nd n

ew

inve

stm

ent o

r w

heth

er a

cces

s to

ext

erna

l fin

anci

ng is

Find

that

har

d bu

dget

con

stra

ints

(H

BC

s) d

o pr

omot

e pa

ssiv

e re

stru

ctur

ing,

in th

e fo

rm o

f la

bor

shed

ding

, but

not

new

in

vest

men

t. A

ctiv

e re

stru

ctur

ing

requ

ires

acc

ess

to e

xter

nal

fina

ncin

g. T

ight

ened

ban

k cr

edit

can

indu

ce H

BC

s an

d ra

ise

ente

rpri

se e

ffic

ienc

y in

the

shor

t-ru

n, b

ut a

t the

cos

t of

curt

ailin

g in

vest

men

t.

32

requ

ired

to p

rom

ote

new

inve

stm

ent.

Cul

l, M

ates

ova

and

Shir

ley

(200

2)

Exa

min

e th

e in

cent

ive

that

man

ager

s of

vou

cher

-pr

ivat

ized

Cze

ch c

ompa

nies

hav

e to

“tu

nnel

” (s

trip

ass

ets

out o

f co

mpa

nies

at t

he e

xpen

se o

f ou

tsid

e sh

areh

olde

rs)

and

“loo

t” th

eir

com

pani

es. L

ootin

g oc

curs

whe

n fi

rms

face

a s

oft b

udge

t con

stra

int a

nd m

anag

ers

are

able

to

borr

ow h

eavi

ly, e

xtra

ct f

unds

fro

m th

e fi

rm, a

nd th

en

defa

ult o

n th

e de

bt w

itho

ut p

enal

ty.

Em

ploy

a d

atas

et

wit

h 1,

017

obse

rvat

ions

fro

m 3

92 c

ompa

nies

spr

ead

near

ly e

venl

y be

twee

n 19

94-9

6. H

alf

of th

e fi

rms

wer

e vo

uche

r-pr

ivat

ized

join

t sto

ck c

ompa

nies

(JS

Cs)

whi

le

half

wer

e lim

ited

liab

ility

com

pani

es (

LL

Cs)

.

Con

trol

ling

for

size

, ind

ustr

y, c

apit

al in

tens

ity

and

initi

al le

vera

ge,

find

that

vou

cher

-pri

vati

zed

JSC

s pe

rfor

m s

igni

fica

ntly

wor

se

than

fir

ms

wit

h co

ncen

trat

ed o

wne

rshi

p th

at h

ad to

be

purc

hase

d fo

r ca

sh. I

nves

tmen

t fun

d-co

ntro

lled

JSC

s un

der-

perf

orm

all

oth

er

firm

s, in

clud

ing

othe

r JS

Cs.

Fun

d-co

ntro

lled

JSC

s al

so to

ok o

n li

abili

ties

at a

muc

h fa

ster

rat

e th

an o

ther

fir

ms,

indi

catin

g th

ey

wer

e op

erat

ing

unde

r a

soft

bud

get c

onst

rain

t. T

houg

h no

t abl

e to

m

easu

re d

irec

tly, e

vide

nce

indi

rect

ly s

how

s th

at lo

otin

g w

as a

w

ides

prea

d oc

curr

ence

for

man

y JS

Cs.

33

Table 4: Summary Information on Banking Privatizations, 1980-2003

Panel A: Summary information on banking privatizations in OECD and developing countries, 1980-2000, from Table 1 of Boehmer, Nash and Netter (2003).

Variable

All Countries

OECD Countries

Non-OECD Countries

Number of countries

51

33

18

Number of transactions

270

156

114

Average (median) size per transaction in US$ millions

482.6 (44)

247 (85)

710 (376)

Average (median) percent of enterprise sold in transaction

59.1 (55.0)

46.3 (40.0)

49.6 (41.7)

Percent of transactions through public share offering

37.9

43.6

50.1

Total value of all transactions in US$ millions

1,161,558

38,473

80,897

Panel B: Summary information on banking privatizations, classified by offering type, 1985-2003, from Table 9.4 of Megginson (2004).

Method of sale

Number of transactions

Value (US $ million)

Share issue privatization

144

76,187.85

Asset sale 139 66,714.74

Total 283 142,902.59

34

Tab

le 5

: Su

mm

ary

of E

mpi

rica

l Stu

dies

on

the

Eff

ecti

vene

ss o

f B

ank

Pri

vati

zati

on in

OE

CD

Cou

ntri

es

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

---

St

udy

Sam

ple

desc

ript

ion,

stu

dy p

erio

d, a

nd m

etho

dolo

gy

Sum

mar

y of

em

piri

cal f

indi

ngs

and

conc

lusi

ons

Ver

brug

ge,

Meg

gins

on a

nd

Ow

ens

(199

9)

Stud

y th

e of

feri

ng te

rms

and

shar

e ow

ners

hip

resu

lts f

or

58 u

nsea

sone

d (I

POs)

and

34

seas

oned

off

erin

gs b

y 65

ba

nks

that

wer

e fu

lly

or p

arti

ally

pri

vati

zed

from

198

1 to

19

96. T

hey

then

com

pare

pre

and

pos

t-pr

ivat

izat

ion

perf

orm

ance

cha

nges

for

32

bank

s in

OE

CD

cou

ntri

es a

nd

five

in d

evel

opin

g co

untr

ies.

Doc

umen

t mod

erat

e pe

rfor

man

ce im

prov

emen

ts in

OE

CD

co

untr

ies.

Rat

ios

prox

ying

for

pro

fita

bilit

y, f

ee in

com

e (n

on-

inte

rest

inco

me

as f

ract

ion

of to

tal)

, and

cap

ital a

dequ

acy

incr

ease

si

gnif

ican

tly; l

ever

age

ratio

dec

lines

sig

nifi

cant

ly. D

ocum

ent l

arge

, on

goin

g st

ate

owne

rshi

p, a

nd s

igni

fica

ntly

pos

itive

initi

al r

etur

ns to

IP

O in

vest

ors.

Gle

ason

, M

cNul

ty a

nd

Penn

athu

r (2

003)

Exa

min

e th

e sh

ort a

nd lo

ng-t

erm

sto

ck r

etur

ns to

su

cces

sful

bid

ding

fir

ms

that

par

ticip

ate

in th

e pu

rcha

se o

f a

fina

ncia

l ser

vice

fir

m b

eing

pri

vati

zed.

The

y st

udy

bidd

ers

that

are

US-

base

d or

hav

e st

ock

trad

ed in

a U

S m

arke

t and

exa

min

e 86

tran

sact

ions

fro

m 1

980

thro

ugh

2002

, tho

ugh

mos

t sal

es o

ccur

bet

wee

n 19

95 a

nd 1

998.

Find

that

the

cum

ulat

ive

abno

rmal

ret

urns

(C

AR

s) to

bid

ding

fir

m

shar

ehol

ders

is p

ositi

ve a

roun

d th

e da

te o

f th

e an

noun

cem

ent,

but

that

this

sho

rt-r

un s

uper

ior

perf

orm

ance

is n

ot s

usta

inab

le o

ver

long

er p

erio

ds. W

hile

the

long

-run

CA

Rs

are

(ins

igni

fica

ntly

) ne

gati

ve, t

he a

utho

rs f

ind

that

ban

k bi

dder

s ar

e ab

le to

sig

nifi

cant

ly

redu

ce th

eir

syst

emat

ic r

isks

, rel

ativ

e to

the

hom

e m

arke

t, fo

llow

ing

such

acq

uisi

tions

.

Bra

z (1

999)

E

xam

ines

the

nati

onal

izat

ion

of P

ortu

gal’

s pr

ivat

e ba

nkin

g sy

stem

fol

low

ing

a m

ilit

ary

coup

in 1

974,

as

wel

l as

the

“re-

priv

atiz

atio

n” o

f th

ese

sam

e ba

nks

afte

r 19

90.

He

desc

ribe

s th

e (m

ulti

ple)

obj

ectiv

es o

f th

e Po

rtug

uese

go

vern

men

t in

laun

chin

g th

is b

ank

priv

atiz

atio

n pr

ogra

m,

and

also

dis

cuss

es th

e pr

imar

y m

etho

d of

sal

e (p

ublic

of

fer)

and

off

er te

rms

of th

ese

dive

stit

ures

.

Show

s th

at (

1) th

e pr

oduc

tive

effi

cien

cy o

f pr

ivat

ized

ban

ks

incr

ease

d si

gnif

ican

tly a

fter

div

estit

ure,

wit

h as

sets

per

wor

ker

show

ing

an e

spec

iall

y la

rge

diff

eren

tial

incr

ease

; (2)

pri

vati

zed

bank

s re

duce

d st

aff

at a

sig

nifi

cant

ly m

ore

rapi

d ra

te th

an d

id p

ublic

ba

nks;

and

(3)

pri

vati

zed

bank

s ex

peri

ence

d si

gnif

ican

tly m

ore

rapi

d gr

owth

in th

eir

bran

ch n

etw

orks

than

did

sta

te b

anks

.

Otc

here

and

C

han

(200

3)

Per

form

a c

linic

al a

naly

sis

(cas

e st

udy)

of

the

impa

ct th

at

Com

mon

wea

lth B

ank

of A

ustr

alia

’s (

CB

A’s

) pr

ivat

izat

ion

had

on th

e ba

nk it

self

as

wel

l as

on it

s do

mes

tic

riva

ls. T

he in

itial

sal

e of

CB

A w

as e

xecu

ted

in

1991

, and

the

bank

was

ful

ly d

ives

ted

in 1

996.

Fin

d th

at (

1) th

e st

ock

pric

es o

f m

ajor

riv

al b

anks

rea

cted

neg

ativ

ely

to C

BA

’s s

ales

, with

esp

ecia

lly

nega

tive

reac

tions

to th

e in

itial

and

fi

nal s

ales

; (2)

CB

A’s

long

-run

sto

ck p

rice

per

form

ance

is

sign

ific

antly

pos

itive

, and

incr

ease

s st

eadi

ly a

s th

e go

vern

men

t’s

owne

rshi

p st

ake

decl

ines

; (3)

the

fina

ncia

l and

ope

ratin

g pe

rfor

man

ce o

f C

BA

impr

oves

sig

nifi

cant

ly a

fter

pri

vati

zatio

n, a

nd

surp

asse

s th

at o

f its

maj

or r

ival

s.

35

Tab

le 6

: Su

mm

ary

of E

mpi

rica

l Stu

dies

on

the

Eff

ecti

vene

ss o

f B

ank

Pri

vati

zati

on in

Non

-Tra

nsit

ion

Dev

elop

ing

Cou

ntri

es

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

---

St

udy

Sam

ple

desc

ript

ion,

stu

dy p

erio

d, a

nd m

etho

dolo

gy

Sum

mar

y of

em

piri

cal f

indi

ngs

and

conc

lusi

ons

Bou

bakr

i, C

osse

t, Fi

sche

r an

d G

uedh

ami

(200

3)

Exa

min

e th

e po

st-p

riva

tiza

tion

perf

orm

ance

of

81 b

anks

di

vest

ed in

who

le o

r (m

uch

mor

e fr

eque

ntly

) in

par

t by

gove

rnm

ents

of

22 d

evel

opin

g co

untr

ies

over

the

peri

od

1986

-199

8.

Find

that

(1)

pri

vati

zati

on a

lone

doe

s no

t see

m to

sig

nifi

cant

ly

impa

ct p

rofi

tabi

lity

or o

pera

ting

effi

cien

cy; (

2) o

wne

rshi

p ty

pe a

nd

indu

stry

con

cent

ratio

n si

gnif

ican

tly im

pact

s ri

sk ta

king

beh

avio

r by

pr

ivat

ized

ban

ks, w

ith b

anks

con

trol

led

by in

dust

rial

gro

ups

taki

ng

the

high

est r

isk

expo

sure

, fol

low

ed b

y lo

cally

con

trol

led

bank

s an

d w

ith

fore

ign

owne

d ba

nks

taki

ng th

e le

ast e

xpos

ure;

and

(3)

for

eign

ow

ned

bank

s ha

ve lo

wer

net

inte

rest

mar

gins

than

do

loca

lly o

wne

d ba

nks.

Otc

here

(20

03)

Per

form

s a

sim

ilar

pre

- ve

rsus

pos

t-pr

ivat

izat

ion

anal

ysis

of

ope

rati

ng p

erfo

rman

ce c

hang

es, a

s w

ell a

s an

as

sess

men

t of

stoc

k pr

ice

perf

orm

ance

, for

21

bank

s pr

ivat

izat

ions

(18

uns

easo

ned

and

thre

e se

ason

ed

offe

ring

s) in

low

and

mid

dle

inco

me

coun

trie

s fr

om 1

989

to 1

997.

He

also

com

pute

s th

e sa

me

mea

sure

s fo

r 28

riv

al

firm

s fo

r co

mpa

riso

n pu

rpos

es.

He

find

s th

at p

riva

tiza

tion

anno

unce

men

ts e

licit

sig

nifi

cant

ly

nega

tive

sto

ck p

rice

rea

ctio

ns f

rom

riv

al b

anks

, whi

ch a

re m

ore

nega

tive

the

larg

er th

e st

ate

owne

rshi

p fr

actio

n th

at is

div

este

d.

The

se f

indi

ngs

supp

ort t

he “

com

petit

ive

effe

cts”

hyp

othe

sis

and

sugg

est t

hat i

nves

tors

vie

w p

riva

tizat

ion

anno

unce

men

ts a

s fo

resh

adow

ing

bad

new

s fo

r ri

val b

anks

. He

find

s th

at th

e pr

ivat

ized

ba

nk s

tock

s si

gnif

ican

tly

unde

r-pe

rfor

m th

eir

resp

ectiv

e st

ock

mar

kets

, and

thes

e re

turn

s ar

e al

so (

insi

gnif

ican

tly)

low

er th

an th

ose

achi

eved

by

riva

l ban

k st

ocks

Bec

k, C

ull a

nd

Jero

me

(200

3)

Exa

min

es th

e ef

fect

of

priv

atiz

atio

n on

per

form

ance

usi

ng

an u

nbal

ance

d pa

nel o

f 69

ban

ks w

ith

annu

al d

ata

for

the

peri

od 1

990-

2001

. The

aut

hors

foc

us o

n th

e ni

ne b

anks

th

at w

ere

com

plet

ely

priv

atiz

ed d

urin

g th

is p

erio

d.

Dcu

men

t a s

igni

fica

ntly

pos

itive

impa

ct f

rom

pri

vatiz

atio

n, e

ven

in

a m

acro

econ

omic

and

reg

ulat

ory

envi

ronm

ent t

hat w

as in

hosp

itabl

e to

fin

anci

al in

term

edia

tion

. Pri

vatiz

atio

n he

lped

clo

se th

e ve

ry w

ide

gap

betw

een

the

perf

orm

ance

of

stat

e-ow

ned

bank

s an

d pr

ivat

e ba

nks

in N

iger

ia, t

houg

h th

e pe

rfor

man

ce o

f di

vest

ed f

irm

s ne

ver

surp

asse

d th

at o

f pr

ivat

e ba

nks.

36

Tab

le 7

: Su

mm

ary

of E

mpi

rica

l Stu

dies

on

the

Eco

nom

ic I

mpa

ct o

f F

orei

gn B

ank

Ow

ners

hip

in D

evel

opin

g C

ount

ries

--

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

----

-

Stud

y Sa

mpl

e de

scri

ptio

n, s

tudy

per

iod,

and

met

hodo

logy

Su

mm

ary

of e

mpi

rica

l fin

ding

s an

d co

nclu

sion

s

Cla

esse

ns,

Dem

irgü

ç-K

unt

and

Hui

zing

a (1

998)

Exa

min

e th

e ex

tent

of

fore

ign

owne

rshi

p in

80

nati

onal

m

arke

ts o

ver

the

1988

-199

5 pe

riod

, and

test

whe

ther

net

in

tere

st m

argi

ns, c

osts

, tax

es p

aid,

and

pro

fita

bilit

y ar

e di

ffer

ent b

etw

een

dom

estic

and

for

eign

-ow

ned

bank

s.

Find

that

for

eign

ban

ks a

chie

ve h

ighe

r pr

ofits

than

dom

esti

c ba

nks

in d

evel

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dit a

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anka

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2003

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s. F

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hig

her

prof

itabi

lity

leve

ls.

37

Appendix 1: Details of Banking Privatization This table presents key information about banking privatizations executed by governments around the world. Most of the data presented here is from the Financial Times and/or the FT.COM website, but other sources are employed as well. In particular, sales marked with an asterisk are taken from various issues of Privatisation International (1998-2000) and Privatisation International Yearbooks (1998-2001). The method of sale refers to whether the company was divested via a share issue privatization (SIP) or asset sale. Source: Table 9.4 in William L. Megginson, The Financial Economics of Privatization (Oxford University Press, New York, 2004).

Country Company Date Amount of offer (US $ million)

Method of sale

Fraction sold

Argentina Banco de Santa Fe * May 98 $ 57.3 Asset sale 90% Argentina Banco Hipotecario * Jan 99 $ 496.5 SIP 46% Australia Commonwealth Bank Jul 91 $ 1,017 SIP 29.75% Australia Commonwealth Bank Oct 93 $ 878 SIP 19.90% Australia State Bank of New South Wales * Sep 94 $ 426.75 Asset sale 1 --- Australia Bank of Western Australia (Bank West) * Dec 95 $ 672 Asset sale 2 --- Australia Bank of South Australia (Bank SA) 1995 $ 525 Asset sale --- Australia Bank West * 1996 $ 325 SIP --- Australia Commonwealth Bank Jul 96 $ 3,100 SIP 50.4% Australia Bank of Queensland * Nov 99 $ 86.7 SIP 39.6% Australia Trust Bank * Dec 99 $ 96.2 Asset sale 100% Austria Salzburger Sparkasse * Oct 95 $ 188 Asset sale 70% Austria Hypo Niederoesterreichische * Jun 96 --- Asset sale 26% Austria Oberoesterreiche Hypo Nov 96 $ 158.9 Asset sale 49% Austria Creditanstalt Jan 97 $ 1,586 Asset sale 70% 3 Austria Bank Austria Feb 98 $ 389 Asset sale 9.6% 4 Austria Salzburger Landes-Hypothekenbank Oct 98 --- Asset sale 50.01% Belgium Credit Agricole / Landbouw Krediet * 1995 $ 55 Asset sale --- Belgium Credit Communal de Belgigue Nov 96 $ 1,100 SIP 34.5% Belgium Credit Agricole / Landbouw Krediet * 1996 $ 33 Asset sale --- Belgium ASLK-CGER * Dec 98 $ 1,500 Asset sale 25.1% Brazil Banco Meridional 1997 $ 241.5 Asset sale --- Brazil Bemge * Sep 98 $ 494 Asset sale --- Brazil Bandepe * Nov 98 $ 154 Asset sale 99.97% Brazil Baneb * Jun 99 $ 144.8 Asset sale 94% Brazil Banestado Oct 00 $ 871 Asset sale 88% 5 Brazil Banespa Nov 00 $ 3,600 Asset sale 76% 6 Bulgaria United Bulgarian Bank Jul 97 $ 30 Asset sale 65% 7 Bulgaria Post Bank * Aug 98 $ 38 Asset sale 78.23% Bulgaria Express Bank * Sep 99 $ 39.5 Asset sale 67%

1 Stake sold by New South Wales state government to Colonial Mutual, a Melbourne-based insurance group. Colonial

Mutual also promised to make a $ 259 million capital injection at the end of four years and not to sell the firm to any of Australia’s Big Four banks.

2 Stake sold by Western Australian state government to Bank of Scotland. 3 In a highly politicized sale, the state’s controlling stake was sold to Creditanstalt’s main rival, Bank Austria. 4 State’s remaining stake in Bank Austria sold to Dresdner Bank of Germany. 5 Stake sold to Banco Italu. 6 Stake sold to Spain’s Banco Santander Central Hispano. 7 Purchase paid for through a $ 30 million rights issue after the sale. Stake sold to Oppenheimer (US) and the European

bank for Reconstruction and Development.

38

Bulgaria Bulbank Jul 00 $ 345 Asset sale 98% 8 Bulgaria DSK Bank Apr 03 $ 336 Asset sale 100% 9 China Bank of Shanghai 2001 $ 62 Asset sale 8% 10 China Bank of China Jul 02 $ 2,800 SIP --- China Pudong Development Bank Dec 02 $ 67 Asset sale 5% 11 Colombia Banco Corpavi 1994 $ 170 SIP 34.2% Colombia Banco Ganadero 1996 $ 328 Asset sale 40% Colombia Banco Popular 1996 $ 271 Asset sale 80% Cote d’Ivoire SGBCI Jun 99 $ 5.75 SIP --- Croatia Zagrebacka Bank Jun 96 $ 25 SIP --- Czech Republic Komercni Bank Jul 95 $ 85 SIP 4% Czech Republic Komercni Bank May 96 $ 50 SIP 3.2% Czech Republic Investicni a Postovni Banka (IPB) * Jan 98 $ 81.8 Asset sale 36% Czech Republic Ceskoslovenska Obchodni Banka (CSOB) Jun 99 $ 1,175 Asset sale 69.99% 12 Czech Republic Komercni Bank Jun 01 $ 1,210 Asset sale 60% 13 Denmark Girobank * 1993 $ 110 SIP 51% Egypt Commercial International Bank * 1993 $ 115 SIP 26.25% Egypt Commercial International Bank * 1996 $ 119 SIP --- Egypt Egyptian American Bank * 1996 $ 35 SIP --- Egypt Misra International Bank * 1996 $ 34 SIP --- Egypt Alexandria Commercial & Maritime Bank * 1997 $ 26.6 SIP --- Egypt Cairo Barclays Bank * Jan 99 $ 4 Asset sale 11% Finland Skopbank Loan Portfolio * 1995 $ 134 Asset sale --- France Banque Paribas Jan 87 $ 2,740 SIP 100% France Banque de Batements de Travaux Publics Apr 87 $ 67 SIP 100% France Banque Industrialle & Mobiliere Privee

(BIMP) Apr 87 $ 60 SIP 100%

France Credit Commercial de France Apr 87 $ 732 SIP 100% France Credit Local de France Nov 91 $ 340 SIP 22% France Credit Local de France Jun 93 $ 738 SIP 30.5% France Banque Nationale de Paris Oct 93 $ 4,920 SIP 60% France Banque Francaise du Commerce Exterieur * 1995 $ 500 Asset sale --- France CIC Apr 98 $ 2,200 Asset sale 67% 14 France Societe Marseillais de Credit * Oct 98 $ 1,795 Asset sale 100% France Credit Lyonnais Jul 99 $ 6,960 SIP 90% France Credit Foncier de France (CFF) Jul 99 $ 700 Asset sale 90.6% France Banque Hervet Feb 01 $ 413 Asset sale 90% 15 France Credit Agricole Dec 01 $ 3,158 SIP --- France Credit Lyonnais Nov 02 $ 2,200 Asset sale 10.9% 16 Germany Deutsche Verkehrs–Kredit–Bank (DVKB) Mar 88 $ 34 SIP 24.9% Germany Deutsche Siedlungs-Und Landesrentenbank

(DSL) Oct 89 $ 241 SIP 48%

Germany Deutsche Kreditbank (DKB) 1995 $ 3,234 Asset sale --- Ghana Ghana Commercial Bank * 1996 $ 26 Asset sale ---

8 Stake sold to a consortium of Italy’s UniCredito and Germany’s Allianz. 9 Stake sold to Hungary’s OTP Bank. 10 Stake sold to HSBC. 11 Stake sold Citigroup. 12 Stake sold to Belgium’s KBC. 13 Stake sod to France’s Societe Generale. 14 Sake sold to France’s Credit Mutuel. 15 Stake sold to CCF, which had recently been acquired by Britain’s HSBC. 16 Stake sold to BNP Paribas.

39

Ghana Ghana Commercial Bank * 1996 $ 35 SIP --- Ghana Social Security Bank * 1997 $ 16.6 Asset sale --- Greece Bank of Athens * 1993 $ 28 Asset sale 66.67% Greece General Hellenic Bank Apr 98 $ 67 SIP 50% Greece National Bank of Greece May 98 $ 379 SIP 10% Greece Cretabank Jul 98 $ 304 Asset sale 17 --- Greece Bank of Central Greece Aug 98 $ 59 Asset sale 56% Greece National Bank of Greece Apr 99 $ 553 SIP 4% Greece National Bank of Greece Oct 99 $ 348 SIP 2.9% Greece Ionian Bank 1999 $ 623 Asset sale 51% Greece Commercial Bank of Greece Jun 00 $ 283 Asset sale 6.7% 18 Guyana National Bank of Industry Oct 97 $ 20 Asset sale 47.5% 19 Hungary Magyar Kulkereskedelmi Bank Jul 94 $ 92 Asset sale 42% Hungary Budapest Bank 1995 $ 87 Asset sale --- Hungary National Savings & Commercial Bank (OTP) 1995 $ 89 SIP 30% Hungary Magyar Hitel Bank * 1996 $ 89 Asset sale --- Hungary OTP Bank Oct 97 $ 213 Asset sale 25% Hungary OTP Bank Oct 97 $ 140 SIP 16.4% Hungary Kereskedelmi es Hitelbank (K&H Bank) 1997 $ 30 Asset sale --- Hungary Mezobank 1997 $ 25 Asset sale --- Hungary Penzintezeti Kozpont Bank (PK Bank) 1997 $ 18.9 Asset sale --- Hungary OTP Bank Nov 99 $ 162 SIP 14.1% Iceland National Bank of Iceland * Sep 98 $ 24.5 SIP 15.75% Iceland Iceland Investment Bank (FBA) * Nov 98 $ 67 SIP 49% Iceland Bunadarbanki * Dec 98 $ 10 SIP 8.5% Iceland Iceland Investment Bank Nov 99 $ 136.5 Asset sale 51% Iceland National Bank of Iceland Oct 02 $ 138 Asset sale 45.8% 20 India State Bank of India Dec 93 $ 713 SIP 29.4% India Industrial Development Bank of India 1995 $ 758 SIP --- India State Bank of India Oct 96 $ 370 SIP --- India Bank of Baroda 1997 $ 235 SIP --- India Bank of India 1997 $ 186 SIP --- India Corporation Bank 1997 $ 84 SIP --- India Dena Bank 1997 $ 50 SIP --- Indonesia Bank Negara Indonesia Nov 96 $ 400 SIP 25% Indonesia Bank Central Asia Mar 02 $ 539 Asset sale 51% 21 Israel IDB Holding 1992 $ 350 Asset sale 42.5% Israel Israel Union Bank May 93 $ 85.5 Asset sale 60% Israel Bank Hapoalim May 93 $ 120 SIP 6.9% Israel Bank Leumi * Aug 93 $ 272 SIP 14.8% Israel Bank Hapoalim * Nov 93 $ 122 SIP 6.4% Israel Bank Mizrahi Nov 94 $ 110 Asset sale 26% 22 Israel Bank Mizrahi * 1995 $ 110 Asset sale --- Israel Israel Discount Bank Mar 96 $ 80 SIP 16% Israel Israel Discount Bank * Apr 97 $ 180 SIP 19.1%

17 Sold to Latsis Oil and shipping group for an unexpectedly high price. 18 Stake sold to France’s Credit Agricole. 19 Stake sold to Republic Bank of Trinidad and Tobago. 20 Stake sold to Samson, Iceland’s second largest bank, leaving the government with a 2.5% holding – which it plans to

retain. 21 State residual holding sold to Farallon Capital, a US based investment group. 22 Stake sold to the Ofer-Wertheim consortium, which also acquired an option to purchase an additional 25% within 18

months.

40

Israel Bank Leumi * May 97 $ 406 SIP 18.4% Israel Bank Mizrahi * Jul 97 $ 129 SIP 25% Israel Bank Hapoalim Sep 97 $ 1,370 Asset sale 43% 23 Israel Bank Hapoalim * Feb 98 $ 168 SIP 7.5% Israel Bank Leumi Apr 98 $ 52 SIP 2% Israel Bank Mizrahi Jun 98 $ 200 SIP 31.7% Israel Bank Leumi Sep 98 $ 160 SIP 7.5% Israel Bank Hapoalim * Apr 99 $ 59 SIP 2% Israel Bank Hapoalim Jul 99 $ 160 SIP 4% Israel Bank Hapoalim Jun 00 $ 582 SIP 17% Italy Banca Commerciale Italiana Aug 85 $ 118 SIP 12% Italy Banco di Napoli Nov 91 $ 323 SIP 9.7% Italy Credito Italiano Nov 91 $ 140 SIP 7% Italy Istituto Bancario San Paolo Mar 92 $ 709 SIP 20% Italy Credito Italiano Dec 93 $ 1,079 SIP 58% Italy Credito Italiano Dec 93 $ 100 SIP --- Italy Istituto Mobiliare Italiano Jan 94 $ 1,513 SIP 30% Italy Banca Commerciale Italiana Feb 94 $ 1,700 SIP 54% Italy Istituto Mobiliare Italiano Jul 95 $ 733 Asset sale 3.5% 24 Italy Istituto Mobiliare Italiano Jul 96 $ 327 SIP 6.93% Italy Istituto San Paolo di Torino May 97 $ 730 SIP 46% Italy Banca di Roma Nov 97 $ 1,740 SIP 36.5% Italy Banco di Napoli 1997 $ 39 Asset sale --- Italy Cariplo Bank 1997 $ 5,000 Asset sale --- Italy Banca Nazionale del Lavoro Nov 98 $ 4,600 SIP 85% Italy Banca Monte dei Paschi di Siena Jun 99 $ 2,302 SIP 27% Italy Mediocredito Centrale Nov 99 $ 2,148 Asset sale 100% Italy Banca Regionale Europea Dec 99 $ 1,421 Asset sale 56.73% Jamaica NCB Group Nov 86 $ 16 SIP 100% Japan Nippon Credit Bank Jun 00 $ 932 Asset sale 80% 25 Kazakhstan Turanalem Bank * Mar 98 $ 100 Asset sale 72% Kenya National Bank of Kenya Nov 94 $ 10 SIP 20% Kenya Kenya Commercial Bank * 1996 $ 11 SIP --- Kenya Kenya Commercial Bank May 98 $ 29.4 SIP 25% Korea Citizens National Bank Aug 94 $ 264 SIP 10% Korea Seoul Bank Mar 99 $ 700 Asset sale 70% Korea Woori Financial Group Jun 02 $ 509 SIP 12% Korea Seoul Bank Sep 02 $ 965 Asset sale --- Korea Chohung Bank Jun 03 $ 2,530 Asset sale 80% 26 Kuwait Kuwait Real Estate Bank * 1996 $ 42 Asset sale --- Kuwait Burgan Bank * 1997 $ 158 Asset sale --- Kuwait Burgan Bank * 1997 $ 270.6 SIP --- Kuwait Commercial Bank of Kuwait * 1997 $ 32.7 Asset sale --- Kuwait Gulf Bank * 1997 $ 56 Asset sale --- Kuwait Gulf Bank * 1997 $ 57 Asset sale --- Latvia Latvijas Unibanka May 96 $ 10 Asset sale 23% 27 Lithuania Lithuanian Agricultural Bank Mar 02 $ 20 Asset sale 76.01% 28

23 State’s remaining stake sold to a group of investors led by Ted Arison, a well known US-Israeli billionaire. 24 Private placement of shares to Istituto Bancario San Paolo di Torino. 25 After being nationalized by the Japanese government in 1998, Nippon Credit bank was sold to a group led by Softbank. 26 After nationalizing much of the Korean banking system after the Asian financial crisis of 1997, and then injecting $

132.5 billion into bailing out these banks, the government’s stake in Chohung was sold to Shinhan Financial Group. 27 Stake sold to the European Bank fro Reconstruction and Development.

41

Macedonia Stopanska Banka Sep 97 $ 17.6 Asset sale 55% 29 Malta Mid-Med Bank * Apr 99 $ 250 Asset sale 67.1% Mexico Grupo Financiero Bancomer * Oct 91 $ 2,798 Asset sale 56% Mexico Banco Nacional de Mexico (Banamex) * Aug 91 $ 4,430 Asset sale 70.7% Mexico Grupo Financiero Bancomer Mar 92 $ 837 SIP --- Mexico Grupo Financiero Serfin Dec 93 $ 420 SIP --- Mexico BBVA Bancomer Jan 02 $ 865 Asset sale 11.6% 30 Mongolia Trade and Development Bank May 02 $ 12.23 Asset sale 76% 31 Morocco Banque Marocaine du Commerce Exterieur Jan 95 $ 169 SIP 50% Morocco Credit-Eqdom Jun 95 $ 9 SIP 18% Morocco Banque Marocaine du Commerce Exterieur Apr 96 $ 50 SIP --- Morocco Banque Marocaine du Commerce Exterieur * 1997 $ 80 Asset sale --- Morocco Banque Marocaine du Commerce Exterieur * 1997 $ 64 SIP --- Mozambique Commercial Bank of Mozambique * 1996 $ 11 Asset sale --- Mozambique Banco Populaire de Desenvolvimento * 1997 $ 21 Asset sale --- Norway Christiania Bank Dec 93 $ 259 SIP 22% Norway Christiania Bank Nov 95 $ 150 SIP 17% Norway Fokus Bank 1995 $ 291 SIP 96% Norway Den Norske Bank 1996 $ 376 SIP 19.8% Norway Union Bank of Norway * 1996 $ 275 SIP --- Norway Christiania Bank * Mar 99 $ 348 SIP 16% Norway Christiania Bank Oct 00 $ 2,900 Asset sale 35% 32 Pakistan Habib Credit ad Exchange Bank Jun 97 $ 39 Asset sale 70% 33 Pakistan First Women Bank * 1997 $ 6.5 Asset sale --- Pakistan Schon Bank * 1997 $ 11.2 Asset sale --- Pakistan United Bank Limited Oct 02 $ 208 Asset sale 51% 34 Peru Banco Popular * 1993 $ 6 Asset sale 100% Peru Interbanc * Jul 94 $ 51 Asset sale 100% Peru Banco Continental * Apr 95 $ 256 Asset sale 60% Peru Banco Continental Jul 98 $ 68 SIP 20% Philippines Philippine National Bank Mar 92 $ 89 SIP 10% Philippines International Corporate Bank * 1993 $ 114 Asset sale 93.7% Philippines Philippine National Bank 1995 $ 71 SIP 8% Philippines Philippine National Bank * Dec 99 $ 230 Asset sale 35% Philippines Philippine National Bank Jul 00 $ 141 Asset sale 30% 35 Poland Bank Slaski Jan 94 $ 64 SIP 30% Poland Bank Premyslowo Handlowy Jan 95 $ 150 SIP 50.1% Poland Bank Gdanski Dec 95 $ 67 SIP --- Poland Polish Development Bank * 1995 $ 17 SIP --- Poland Bank Slaski Jun 96 $ 196 Asset sale 7.25% 36

28 Stake sold, after five years of trying, to the Germany’s Norddeutsche Landesbank Girozentrale. 29 Stake sold to group including Austria’s Giro Bank, the European Bank for Reconstruction and Development and the

International Finance Corporation. 30 The Mexican government sold its remaining stake in the former Bancomer to Spain’s Banco Bilbao Vizcaya Argentaria,

which already had a 48.5 percent stake in the bank. 31 Stake sold to Banca Commerciale Lugano/Gerald Metals, a Swiss –US consortium. 32 The government’s residual stake sold to Nordic Bank Holding. 33 Stake sold to the UAE’s Sheikh Nahayan bin Mubarak Al Nahyan. The state planned to retain its 20% stake

indefinitely. 34 Stake sold to a group of investors from Abu Dhabi and Bestway Holdings, a company representing expatriate

Pakistanis. The state plans to retain the remaining 49% stake. 35 State’s remaining stake sold Lucio Tan, a Philippine businessman and friend of President Joseph Estrada. 36 ING, the Dutch financial services group, raised its stake to 33.15 percent.

42

Poland Petrobank * 1996 $ 48 Asset sale --- Poland Wielkopolski Bank Kredytowy * 1996 $ 60 Asset sale --- Poland Bank Gdanski Feb 97 $ 83.4 Asset sale 32% 37 Poland Powszechny Bank Kredytowy 1997 $ 300.2 SIP 65% Poland Polish Investment Bank Apr 97 $ 67 Asset sale 100% 38 Poland Bank Premyslowo Handlowy Jun 97 $ 660 SIP --- Poland Export Development Bank Sep 97 $ 94.5 Asset sale 15.9% 39 Poland Powszechny Bank Kredytowy Sep 97 $ 264 SIP 65% Poland Polish Development Bank May 98 $ 52.8 Asset sale 44.54% Poland Bank Pekao * Jun 98 $ 260 SIP 15% Poland PKBL * Oct 98 $ 51.9 Asset sale 99.93% Poland BPH * Nov 98 $ 600.6 Asset sale 36.7% Poland Bank Pekao * Jun 99 $ 1,090 Asset sale 52.09% Poland Bank Zachodni * Jun 99 $ 580 Asset sale 80% Poland Powszechny Bank Kredytowy Jun 00 $ 76.06 Asset sale 10.3% 40 Poland Bank Pekao Oct 00 $ 133 SIP --- Portugal Banco Totta and Acores Jul 89 $ 195 SIP --- Portugal Banco Totta and Acores Jul 90 $ 153 SIP 31% Portugal Banco Portugues do Atlantico Dec 90 $ 382 SIP 33% Portugal Sociedad Financeria Portuuesa May 91 $ 109 SIP 7.5% Portugal Banco Espirito Santo e Comercial de Lisbon

(BESCL) Jul 91 $ 385 SIP 40%

Portugal Banco Fonsecas & Burnay Aug 91 $ 247 SIP 80% Portugal BESCL Feb 92 $ 590 SIP 60% Portugal Banco Portugues do Atlantico May 92 $ 346 SIP 17.64% Portugal Banco Fonsecas & Burnay Jul 92 $ 61 SIP 20% Portugal Credito Predial Portugues Dec 92 $ 279 SIP 100% Portugal União de Bancos Portugues Dec 92 $ 167 SIP 61.2% Portugal Banco Portugues do Atlantico Jul 93 $ 221 SIP 17.5% Portugal Banco Portugues do Atlantico Mar 94 $ 105 SIP 7.5% Portugal Banco Pinto & Sotto Mayor Nov 94 $ 255 SIP 80% Portugal Banco Fomento Exteroir Dec 94 $ 133 SIP 80% Portugal Banco Pinto & Sotto Mayor Mar 95 $ 46 SIP 20% Portugal Banco Fomento Exteroir * 1996 $ 892 Asset sale --- Portugal Banco Totta e Acores 1996 $ 135 SIP --- Portugal Banco Fomento Exteroir * 1997 $ 35.9 SIP 3.5% Romania Banca Romana pentru Dezvoltare Dec 98 $ 200 Asset sale 41% Romania Banc Post Apr 99 $ 42.8 Asset sale 42% Romania Banca Agriola Apr 01 $ 52 Asset sale 98% 41 Russia Vneshtorgbank Dec 02 $ 300 Asset sale 20% 42 Singapore Keppel Bank 1993 $ 235 SIP --- Slovakia Slovenska Sporitelna Dec 00 $ 347 Asset sale 87% 43 Slovakia Vseobecna Uverova bank (VUB) Jun 01 $ 473 Asset sale 94.5% 44

37 Stake sold to the Polish bank IG, giving the bank a 63% holding. 38 Stake sold to Poland’s Kredyt Bank. 39 Commerzbank, which already owned a 32.8 percent stake, increased its holding to 48.7 percent through a $ 94.5 million

share offering reserved for it alone. Italy’s BCI also acquired a 5 percent stake at the same time for an undisclosed price. 40 Bank of Austria increased its stake in PKB to 57 percent with this sale. 41 Stake sold to a consortium including Raiffeisen Zentralbank, the Austrian bank, the Austrian bank, and the Romanian-

American Enterprise Fund. 42 Stake sold to European Bank for Reconstruction and Development, leaving the Russian government with a 79.9

percent holding. 43 Stake sold to Austria’s Erste Bank.

43

Slovenia Nova Ljubljanska Banka (NLB) 2002 $ 427.7 Asset sale 34% 45 Spain Argentaria May 93 $ 1,027 SIP 24.9% Spain Argentaria Nov 93 $ 1,214 SIP 25% Spain Argentaria Mar 96 $ 1,200 SIP 25% Spain Argentaria Feb 98 $ 2,300 SIP 25% Sri Lanka National Development Bank of Sri Lanka * 1997 $ 75 SIP --- Sweden Nordbanken Oct 95 $ 893 SIP 30% Sweden Nordbanken 1997 $ 907.3 SIP --- Taiwan Chiao-Tung Bank * 1996 $ 219 SIP --- Taiwan Chiao-Tung Bank * Aug 97 $ 982.7 Asset sale --- Taiwan Chang Hwa Commercial bank * Dec 97 $ 381.7 SIP --- Taiwan Taiwan Business Bank * Jan 98 $ 554 SIP --- Taiwan First Commercial Bank * Jan 98 $ 1,372 SIP --- Taiwan HuaNan Commercial Bank * Jan 98 $ 798 SIP --- Taiwan Farmers’ Bank of China * Sep 99 $ 143 SIP --- Taiwan Chiao-Tung Bank * Sep 99 $ 363 SIP --- Taiwan Bank of Kaohsiung * Sep 99 $ 25 SIP --- Thailand Nakomthon Bank Sep 99 $ 317 Asset sale 75% Thailand Radanasin Bank Nov 99 $ 166 Asset sale 75.02% Thailand Bank Thai Oct 02 $ 130 SIP 36.2% 46 Turkey Sekerbank 1993 $ 4 Asset sale 10% Turkey Sumerbank Sep 95 $ 103.5 Asset sale --- Turkey Denizbank May 97 $ 66 Asset sale --- Turkey Anadolubank * May 97 $ 69.5 Asset sale --- Turkey Etibank Jan 98 $ 155.5 Asset sale 100% Turkey Turkiye is Bankasi (Isbank) May 98 $ 651 SIP 12.3% Uganda Uganda Commercial Bank 1997 $ 5 Asset sale --- Uganda Barclays Bank Oct 98 $ 3.8 Asset sale 100% Venezuela Banco Popular 1993 $ 23 Asset sale --- Venezuela Banco de Fomento de Coro 1994 $ 4 Asset sale --- Venezuela Banco Guyana 1995 $ 7 Asset sale --- Venezuela Banco Consolidado 1996 $ 124 Asset sale --- Venezuela Banco de Venezuela Dec 96 $ 338 Asset sale 90% Venezuela Banco Republica Jun 97 $ 56.7 Asset sale 56.7% Venezuela Banco Populary de los Andes Dec 97 $ 47.4 Asset sale 47.25% Venezuela La Confederacion del Canada Venezolana Aug 98 $ 6.4 Asset sale --- Zimbabwe Comercial Bank of Zimbabwe Sep 97 $ 43.7 SIP 80% Total $ 142,902.59

44 Stake sold to Italy’s Banca Intesa. 45 Stake sold to Belgium’s KBC. 46 This offering was only partially successful, with only 77% of the offer subscribed. The government’s stake was thus

reduced only from 96% to 59.8%, rather than to 49% as planned. Additionally, shares of Bank Thai fell sharply soon after the offer, yielding a 3% loss to investors who bought shares at the purchase price – despite the fact that shares were sold at a 9% discount to the previous market price.

44

Table Summary

Method of sale Number of transactions

SIP 144 Asset sale 139 Total 283

Method of sale Value (US $ million)

SIP 76,187.85 Asset sale 66,714.74 Total 142,902.59