Public Banks in Latin America

Alejandro Micco (IDB)

Ugo Panizza (IDB)

Public Banks in Latin America: Myths and RealitiesInter-American Development BankResearch Department

Outline

• State-owned banks around the world and LAC.• The reasons behind the decreasing share of State-

Owned banks.– Fiscal and Efficiency Reasons.

• What do we know about the performance of newly privatized banks.– Efficiency Improvement and increasing Credit Availability

• Concerns about Privatization.– Access to credit (e.g. SME)– Volatility

• Conclusions

State Ownership of Banks is Widespread, Especially in Developing Countries…

Source: Caprio et. al (2000)The data are for 1998

25% - 50%

0 - 10%10% - 25%

N.A.

75% - 100%50% - 75%

…even after a wave of privatizations

Note: Commercial and development banks.Source: Own calculation based on data from La Porta et al. (2001)

From 1987 to 2003 more than 250 were privatized, raising US$143 billing

0

10

20

30

40

50

60

70

80

90

100

IndustrialCountries

Sub-Saharan

Africa

Latin America

East Asia and

Pacific

DevelopingCountries

East and Central Europe

Middle East &

North Africa

South Asia

(%)

1970

1985

1995

…the privatization process maintained its momentum during the second half of the 90s

0%

10%

20%

30%

40%

50%

60%

70%

Industrial Countries

Sub Saharan Africa

Middle EastNorth Africa

Latin America

East Asia and

Pacific

East Europe and

Central Asia

South Asia

1995

1999

2002

Note: Only commercial banks.Source: Own calculation based on data from Micco et al. (2004)

…the reduction of public intervention in the banking industry has been in all LAC.

Table 1: Share of Public Bank Assets (only includes commercial banks)

Year ARG BOL BRA CHL CRI DOM GTM HND MEX NIC SLV

1993 51.6%

1994 52.7% 13.3%

1995 40.9% 53.4% 12.8% 81.0% 6.7% 49.9% 8.8%

1996 35.6% 0.0% 51.4% 11.4% 81.6% 29.6% 6.5% 4.9% 4.6% 29.9% 8.1%

1997 29.9% 0.0% 53.3% 10.9% 78.2% 26.2% 5.1% 3.8% 0.0% 14.3% 7.2%

1998 30.0% 0.0% 50.0% 11.1% 74.9% 21.7% 3.6% 3.1% 0.0% 13.3% 7.0%

1999 26.6% 0.0% 49.1% 10.0% 75.8% 20.8% 3.7% 2.4% 0.0% 1.0% 6.0%

2000 25.6% 0.0% 43.6% 9.0% 71.7 % 19.3% 4.0% 2.3% 0.0% 0.4% 5.6%

2001 20.1% 0.0% 39.4% 9.5% 68.9% 20.1% 4.0% 2.0% 0.0% 0.0% 4.3%

2002 0.0% 67.6% 3.3% 1.8% 0.0% 0.0% 4.4%

2003 0.0% 65.3% 3.9% 1.7%

Source: own calculations based on Balance sheet data

100% in 1990

Today in LAC, public ownership is spread between first and second tier activities

0 0 .0 5 0 .1 0 .15 0 .2 0 .2 5 0 .3

S L VP E RH N DV E NE C UC O L

M E XG T MA R GB O LC H LC R I

D O MP A NB R AU R Y

C o m m e r c i a l A c t .2 n d T i e r A c t .

Source: Own calculation based on data from ALIDE

Figure 4: Share of Public Bank Loans as a percentage of GDP

The privatization process was driven by:

• Fiscal considerations and Crises – Mexico (1990)

• Haber and Musacchio (2004).

– Tequila in Argentina• Berger et al. (2003), Clarke & Cull (1999, 2001), and Clarke, Crivelli & Cull (2005).

– Real Plan in Brazil• Beck et al. (2003) and Baer and Namzi (2000).

• Efficiency considerations– A more efficient banking system should increase access to credit.

..state-owned banks are a mechanism for pursuing the individual goals of politicians.. (“Political” view)

Difference in performance between Public and Domestic Private banks

- 0 . 8

- 0 . 6

- 0 . 4

- 0 . 2

0

0 . 2

0 . 4

R O A M a r g /T A O H /T A E m p /T A

A llD E VI N D

Source: Own calculation based on data from Micco et al. (2004)

Avg.1.3 Avg. 3.9

Avg. 3.8 rate

Per

cent

age

Poi

nts

..difference in NPL and provisions.

- 1

0

1

2

3

4

5

6

7

8

N P L / L P r o v / L

A ll D E V

I N D

Source: Own calculation based on data from Micco et al. (2004)

Avg. Dev. 12

Avg. Dev. 2

Public and Domestic Private Banks in LAC

Source: Own calculation based on data from Micco et al. (2004)

- 0 . 5

0

0 . 5

1

1 . 5

2

2 . 5

3

3 . 5

4

4 . 5

L o a n R a te D e p . R a te O H /T A R O A N P L

D o m . P r iv . P u b .

Using standard measures of performance for private banks:

• In cross section comparisons, public banks under-perform private institutions.

• But these results do not imply that privatizations increase bank efficiency. Focusing only on privatized banks, the empirical studies do not show a clear pattern in term of performance. – Micco et al (2004) for 160 developing countries. – Berger et al (2004) for Argentina.– Otchere (2003) for 9 middle an low income countries.– Megginson (2003) not significant effect for developing countries. – Clark, Cull and Shirley (2003), mixed results for 18 cases.

Bank Privatization and Credit Availability

• Panel regressions indicate that the recent privatization episodes were not associated with an increase in total credit. – For all developing countries, the change in

public intervention (over 1995-2003) is not associated with changes in credit.

– For LAC, the coefficient is marginally significant. Although for some countries privatization reduced credit availability.

..this seems to be the case of Mexico…

F ig u r e 6 : N P L a n d B a n k C r e d it in M e x ic o

0

5

1 0

1 5

2 0

2 5

3 0

3 5

4 0

1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3

0

1 0

2 0

3 0

4 0

5 0

6 0T o t a l c r e d it a s a % o f G D P

P r iv a t e c r e d it a s a % o f G D P

A d ju s t e d N P L , R ig h t s c a le

So ur c e: H aber ( 2 0 0 4 )A djust ed N P L i n c l ude dec l ar ed N P L , r edi sc un t , r est r uc t ur ed an d F O B A P R O A . P r i v at e c r edi t do es n o t i n c l ude F O B A P R O A .

Concerns about Privatization

• The lack of strong evidence in favor of improvement in efficiency and credit availability has raised concerns about the privatization process.

• Critics argue that in some cases privatizations were made without considering the “development” role of public banks:– Be active in markets where imperfections are likely to be more

important: SME and sectors that lack collateral

• The credit contraction during the last downturn (1998) has raised concerns about the role of private banks on credit volatility.– Public banks internalize the effect of credit on output volatility.– Implicit deposit insurance: “Flight to quality”

Empirical work suggests that some of these concerns are not justified.

• Public institutions do not seem to contribute to reduce the credit-access gap between large firms and SME.

– Clarke et al (2005) show that the share of total lending devoted to SME by public banks is smaller than the one devoted by private institutions in Argentina, Chile and Colombia.

– IPES 2004 presents weak evidence in term of the beneficial role of public banks on SME access to credit.

• There is not evidence that the presence of public banks increase credit access in sectors that due to technological reason lack collateral. (Galindo & Micco 2004).

• Related with the volatility concern, there is some evidence that credit by public banks is less cyclical that their private counterpart. (Micco & Panizza 2004).

Bank Ownership and Credit Cyclicality(Bank lending elasticity to GDP)

- 0 . 5

0

0 . 5

1

1 . 5

2

2 . 5

3

I N D . D E V . L A C

P r iv a t e D o m e s t ic B a n k s

S t a t e - O w n e d B a n k s

F o r e ig n - O w n e d B a n k s

Source: Own calculation based on data from Micco and Panizza (2004)

Summing up:State-owned banks in LAC.

• As in the 70-80s, during the 90s the share of public banks fell although they are still important in LAC.

• In LAC public banks participate on first and second tiers activities:– In Argentina public participation is on commercial banks.

– In Mexico the opposite is true (mainly 2nd tier institutions).

– Brazil and Chile are in between.

Summing up:Factor behind the Privatization Process

• Beside fiscal consideration, efficiency reasons were behind the privatization process. More efficient banks should increase credit.– Although cross section results show that public banks

under-perform private inst. in terms of “standard” performance measures, panel results do not show strong evidence that privatized banks increase their performance.

– During the second half of the 90s there is no evidence that the reduction of public intervention increases credit.

Summing up:Concerns about the privatization Process

• Lack of improvement in both efficiency and credit availability raised concern.

• Critics also argue that privatizations did not considered the development role of public banks: – Access to credit (SME, rural areas, etc.)– Credit and Output Volatility.

• Empirical works suggest that some of these concerns are not justified.– Public banks do not increase access to credit for “socially” desired

sectors (e.g. SME and ind. that lack collateral). – Although there is evidence that credit by public banks is less cyclical.

Public Banks in Latin America

Alejandro Micco (IDB)

Ugo Panizza (IDB)

Public Banks in Latin America: Myths and RealitiesInter-American Development BankResearch Department