Nationalised banking sector vs. private banking sector

[Aharon]

Hi to all!

Observing the current economic problems in Europe, I could not help but wonder what benefits a private banking sector offers - why, if the debts can be nationalised, the whole banking system shouldn't.

I am limited to the freely available papers, as I don't have a university or public library account where I could obtain other ressources. I used Google Scholar with the search terms: nationalised bank private sector bank

The search yielded the following papers on the first page:
EPISODES OF SYSTEMIC AND BORDERLINE FINANCIAL CRISES
Bank ownership type and banking relationships
Financial sector liberalization, bank
privatization, and efficiency: Evidence
from Pakistan
Problem Bank Resolutions: Evaluating the Options
Financial liberalisation, crisis, and
restructuring: A comparative study of
bank performance and bank governance
in South East Asia

I admit I have not yet thoroughly read these papers, but only tried to get a rough overview over the topic. The efficiency benchmark used by one of the papers was profit efficiency, and nationalisation is seen as counterproductive for reasons I don't see as neccessarily problematic (quoted from the fourth listed paper):

Opponents argue that a nationalized bank may evolve into an arm of government
economic policy. With this comes incentive problems. As major shareholder, the government
may not be able to require that the bank be efficient and profitable. Bank workers may
essentially become bureaucrats and the institution unable to compete without continued
government indulgences. Indulgences then may lead to the expectation that the bank carry out
political objectives. France using Crédit Lyonnais to bolster national employment is a case in
point.

The purpose of this topic is twofold: On the one hand, I admit that I would appreciate help in finding sources, my google-fu is weak
On the other hand, maybe the preliminary results of this search, and the knowledge of many of the contributors here, can spark a discussion on the subject.

[K. A. Pital]

China has a fully nationalized banking sector and it is not like that sector is much different from the First World banks. Commercial banks operate in the same fashion even if they are owned by the government.

[Starglider]

Privatised banking offers the faint hope that companies will go bankrupt and managers will be kicked out in shame, never to work in the industry again and possibly going to jail, when the results of their bad decisions catch up with them. I know this hasn't happened much recently, but it used to in every previous crisis up to the early 90s savings and loan crisis.

Nationalised banking ensures that this never happens. Bank bosses are high-level civil servants who never get fired (if central government needs a scapgoat they might get moved to another post). Privatised banks try to hide their losses and beg for bailouts, but nationalised ones can call on state censorship, legal protections and automatic infinite bailouts at taxpayer expense. Finally forcibly nationalising a bank tells all potential investors that this government is quite willing to confiscate private wealth whenever it is politically convenient to do so. Why would you risk your capital in a country like that?

[K. A. Pital]

As we have seen, bankruptcy of the private banking sector is impossible.

Why would you risk your capital in a country like that?

Why do people risk their capital in China?

[His Divine Shadow]

Do they execute bank CEOs who fail massively in China? Or could they?

[Starglider]

Why do people risk their capital in China?

China hasn't forcibly nationalised any major industry recently; quite the reverse in fact. I'm sure it was quite difficult for hardened communists to suppress the desire to confiscate, nationalise and destroy private enterprise for so long, but it's paid off in terms of luring capital, business and IP there.

Do they execute bank CEOs who fail massively in China? Or could they?

Not yet but let's see what happens to the Chinese banking system when their own credit & property bubbles burst, not the mention demand from the west collapsing as Europe goes into recession and the US is finally forced to start normalising its trade deficit.*

* I keep a little bit of freeze dried gold dusted survivalist popcorn on hand for just that eventuality.

[K. A. Pital]

Why do people risk their capital in China?

China hasn't forcibly nationalised any major industry recently; quite the reverse in fact. I'm sure it was quite difficult for hardened communists to suppress the desire to confiscate, nationalise and destroy private enterprise for so long, but it's paid off in terms of luring capital, business and IP there.

This is absolutely irrelevant to the question. You spoke about banking specifically. Banking is nationalized in China; there's 2 private banks in total which are like 1% of the banking sector.

We are speaking about the banking sector and only the banking sector. If you say: "Okay, my class interest is that the banking sector remains private because I am a private banker", I could understand that. If you say "Nationalized banking sectors don't work because people won't bring their money and risk their money" that's bullshit and you know that.

And that's coming from me, a person who is not a fan of China's centralized state-monopolistic capitalism, but who can certainly see that it is fully operational (c) and functional, and most of the issues are not related to banks being all state-owned.

[Starglider]

This is absolutely irrelevant to the question. You spoke about banking specifically. Banking is nationalized in China; there's 2 private banks in total which are like 1% of the banking sector.

Of course, but it has been nationalised for essentially the entire collective memory of potential investors. China being a closed state-dominated market is an accepted fact that some brave investors are willing to live with in order to get access to new markets and cheap labour.

Nationalising the banking sectors of developed countries which are currently partly or completely private is another proposition entirely. The original post inherently contains a proposal to change the status quo in that fashion, and while in some cases (e.g. banking system on the brink of collapse) it may improve short term investor confidence, in the medium to long term it will make almost all kinds of foreign direct investment harder to get. Of course when bloated socialist governments are running unsustainable deficits this may actually be a good thing.

And that's coming from me, a person who is not a fan of China's centralized state-monopolistic capitalism, but who can certainly see that it is fully operational (c) and functional, and most of the issues are not related to banks being all state-owned.

Mmyeah. I reserve judgement until I see how they deal with their bubbles popping. Certainly economists are split between 'China decoupling', 'China soft landing' and 'China hard landing' scenarios, with a steady trickle of defectors from the former to the later.

[K. A. Pital]

Nationalising the banking sectors of developed countries which are currently partly or completely private is another proposition entirely. The original post inherently contains a proposal to change the status quo in that fashion, and while in some cases (e.g. banking system on the brink of collapse) it may improve short term investor confidence, in the medium to long term it will make almost all kinds of foreign direct investment harder to get. Of course when bloated socialist governments are running unsustainable deficits this may actually be a good thing.

Yeah. I mean, it is not like private banking systems are allowed to collapse. Therefore, there is no practical difference in the aspect you cited; a private banking system would not be allowed to collapse by the state. Which is a contradiction between the form and the substance; private banks do not hold private risks.

Mmyeah. I reserve judgement until I see how they deal with their bubbles popping. Certainly economists are split between 'China decoupling', 'China soft landing' and 'China hard landing' scenarios, with a steady trickle of defectors from the former to the later.

I'm not sure China is immune to the general systemic crisis of capitalism. What is true, however, is that in the capitalist world China's nationalized banking system has been working for several decades in its present state. The ability to weather the systemic crisis is not relevant. I am sure that capitalism itself will not weather the systemic crisis that is unfolding (by that I do not necessarily mean "socialism" will triumph or, god forgive me, communism - the regressive and reactionary tendencies in capitalism can solve the systemic crisis through other means... not pleasant, perhaps, but archaisation, mass loss of productive capacity and disintegration of large-scale nations and large companies would certainly solve the contradictions for the time being... until the concentration of capital starts rising to present levels again).

[Starglider]

Therefore, there is no practical difference in the aspect you cited; a private banking system would not be allowed to collapse by the state.

Thousands of banks have failed and gone bankrupt in the history of the US and UK. Historically quite serious bank runs and large scale failures have been tolerated, e.g. during the Great Depression. It is only in the last ten years that the concept of 'Too Big To Fail' became implanted in the public consciousness, and it is only in the last three years that economists and politicians have started to seriously say things like 'we can't have another Lehman Brothers' (i.e. no institution of significant size will be allowed to collapse). This is a historical abberation and of course it's bound to end in tears; every single one of the hundreds of mechanisms governments have used to try and suppress short term volatility has ended up increasing the long term systemic risks.

I am sure that capitalism itself will not weather the systemic crisis that is unfolding

Oh, I wouldn't go that far. 'Capitalism' is a pretty big tent. The current international financial and legal paradigm could completely collapse and that wouldn't 'destroy capitalism', just the current globalised finacialised just-in-time ultra-leveraged version.

mass loss of productive capacity and disintegration of large-scale nations and large companies would certainly solve the contradictions for the time being...

There's no way you can have a 'mass loss of productive capability and disintigration of large scale nations' without riots, famines, wars and a horrible death toll. Watch it, the SDN status quo brigade will lynch you for such doomer talk.

[Col. Crackpot]

I'm a Branch Manager for a large multi-national Bank. What incentive do i have to go out of my way and provide more than what is minimally required to serve my clients? What tool do i have to ensure my service reps and tellers are doing more than the bare minimum needed to do their jobs? The Bank of America next door and the Sovereign/Santander across the street, the 3 Credit Unions in the neighborhood and the Community Bank three streets over. Take that competitive environment away and the bank becomes the fucking Registry of Motor Vehicles.

[UnderAGreySky]

As someone who has seen both ends of the scale - state-run banks and private ones both exist in India - I will concur to what Col Crackpot says. You *do* get better service out of the private banks, along with competitive rates. The best bank I have banked with till date, though, was one which had been privatised from being a govt.-backed entity. It had the reach and familiarity - as opposed to smile-at-all-times customer service - of a government bank but the service speed of the private sector. My family's experiences with Bank of India (government-run) on the other hand, have been exasperating.

Anecdotal, yes, but relevant.

[Stark]

Is the spirit of competition why American private banks never engage in predatory lending or the creation of dubious derivatives?

I'm not sure how state-run is supposed to be safer than sensibly regulated, but whatever. Appointing 'successful' private financial guys to run regulatory or decision-making bodies might be a part of the problem, lol.

[Starglider]

Is the spirit of competition why American private banks never engage in predatory lending or the creation of dubious derivatives?

Quite the opposite, those are very profitable as long as nothing goes wrong. Competition does tend to rachet up the risk taking until someone overreaches and fails, but historically (a) much lower liquidity and volume of share trading meant investors were much more likely to invest for the long term, (b) no financial media on a 24hr news cycle vulturing every earnings release and (c) the collapse of unwise banks served as a check on risk taking and a warning to the others. A combination of heavy short-term investing and indefinite government backstops have removed the normal checks on risk. There is absolutely no way that regulators can fill the gap; even the armies of high paid compliance people at investment banks can't keep control of their own traders, never mind third-rate underpaid and/or bribed regulators completely out of the loop and trailing years behind the state of the art in 'financial innovation'.

[Col. Crackpot]

Is the spirit of competition why American private banks never engage in predatory lending or the creation of dubious derivatives?

Quite the opposite, those are very profitable as long as nothing goes wrong. Competition does tend to rachet up the risk taking until someone overreaches and fails, but historically (a) much lower liquidity and volume of share trading meant investors were much more likely to invest for the long term, (b) no financial media on a 24hr news cycle vulturing every earnings release and (c) the collapse of unwise banks served as a check on risk taking and a warning to the others. A combination of heavy short-term investing and indefinite government backstops have removed the normal checks on risk. There is absolutely no way that regulators can fill the gap; even the armies of high paid compliance people at investment banks can't keep control of their own traders, never mind third-rate underpaid and/or bribed regulators completely out of the loop and trailing years behind the state of the art in 'financial innovation'.

The Government with Gramm-Leach-Bliley's Bi-Partisan (at least in the house with 155 dems joining on the fuck the people fun) gutting of Glass Steagal's provisions to firewall deposit banks and investment banks bears as much blame as amoral bankers. If you enable a crackhead by giving him legal access to crack, guess what, he does crack. The government is an enabler. Phill Gramm and Bill Clinton should share cell for this abortion of a law.

[Starglider]

The Government with Gramm-Leach-Bliley's Bi-Partisan (at least in the house with 155 dems joining on the fuck the people fun) gutting of Glass Steagal's provisions to firewall deposit banks and investment banks bears as much blame as amoral bankers. If you enable a crackhead by giving him legal access to crack, guess what, he does crack. The government is an enabler. Phill Gramm and Bill Clinton should share cell for this abortion of a law.

Granted, but removing access to deposit funds only buys a little time if governments continue with the indefinite bailouts. Since most individual accounts are covered by deposit insurance anyway, this isn't the main reason why Too Big To Fails can blackmail governments. My point above was not that regulation is useless, sensible regulation is very important, my point was that you cannot replace a fundamental part of capitalism (anyone can go bankrupt) or solve systemic problems (e.g. the economic growth == debt growth paradigm) by piling on more unenforcable regulations.

[Col. Crackpot]

Granted, but removing access to deposit funds only buys a little time if governments continue with the indefinite bailouts. Since most individual accounts are covered by deposit insurance anyway, this isn't the main reason why Too Big To Fails can blackmail governments. My point above was not that regulation is useless, sensible regulation is very important, my point was that you cannot replace a fundamental part of capitalism (anyone can go bankrupt) or solve systemic problems (e.g. the economic growth == debt growth paradigm) by piling on more unenforcable regulations.

Which is precisely what a single government bank entity would become. How has the financial decision making history of the US Government a been much better than that of your average mega conglomerate? Why is it logical to assume that it will suddenly become better? Is it your assertation that somehow the government will suddenly act in a fiscally sound manner and the best interests of the citizenry when it goes into the banking business? Look i get you, Too big to fail should not have happened, and IMHO these entities should be wound down to a manageable level. But let's not cut off our noses to spite our faces.

[Simon_Jester]

In a state-run bank, is there as much incentive to go way out on a limb in terms of leverage and risk-taking and creative money-folding as an investment strategy?

[Starglider]

How has the financial decision making history of the US Government a been much better than that of your average mega conglomerate? Why is it logical to assume that it will suddenly become better? Is it your assertation that somehow the government will suddenly act in a fiscally sound manner and the best interests of the citizenry when it goes into the banking business?

Oh I agree with you on this point, Stas was the one defending state-run banks (and state enterprise in general). Though since the SDN Orthodoxy is that social security is completely funded and well run, and that US deficits are no problem and should actually be larger (to fund more stimulus), and that Socialism Is Good in general, I'm sure plenty of other people are all for nationalised banking.

[aerius]

In a state-run bank, is there as much incentive to go way out on a limb in terms of leverage and risk-taking and creative money-folding as an investment strategy?

The first 2, probably not, the last one, I'd say just as much or more depending on the country. If you consider the fact that the Federal and State governments steal money out of Social Security & other funds to close budget deficits and fund their pet projects, god knows what the fuckers will do if you give them trillions of bucks to play with. Oh shit, we got a $3 trillion deficit? No problem, we'll just fudge some numbers from the national bank and issue some IOUs and shit to cover it up, then we'll go worry about the budget next year, or let the next president worry about it. It's not like the people need their money anyway.

Other countries might be able to run a nationalized banking system but the US will fuck it up to the point where everyone stuffs all their cash in the mattress.

[Stark]

Conflating regulation with 'unlimited government backstops' is pretty much what I'd expect from someone mindlessly parroting what their buddies tell them, but alarmingly (for some) even relatively useless regulators can be informed, career-desirable, and create a desirable environment. Just, y'know, not in America, where we are to believe that competition makes everything better, because we all forgot what it really does. Man in bank says bank good! BANK GOOD!

Doubtless we'll now hear how Starglider's Pals(tm) told him that regulation is always conducted on a mindless, politically-driven quixotic quest to 'serve' the 'public' by trying and failing to do something that is by definition impossible, instead of y'know, working with market forces and bodies. It's ALMOST like Starglider is just a troll throwing out the bait, when you think about it.

Nobody tell him that people could see the benefits of state-run banks (or regulation, which arguably performs similar functions in the marketplace) without supporting The Bad Things Socialists Say On SDN.

[Starglider]

I will admitt that reading N&P on SDN frequently makes me want to grow a moustache, so that I can twirl it when posting. I'd need a monocle and a top hat to complete the ensemble though.

[K. A. Pital]

Oh I agree with you on this point, Stas was the one defending state-run banks (and state enterprise in general). Though since the SDN Orthodoxy is that social security is completely funded and well run, and that US deficits are no problem and should actually be larger (to fund more stimulus), and that Socialism Is Good in general, I'm sure plenty of other people are all for nationalised banking.

Nah; I was merely noting that there's not much of a difference between the uberbanking oligopoly and a completely nationalized banking sectors. In no way I presumed that the state would be running them better.

You would also note that I wasn't on the "spend your way out of debt" side more often than not here, just for the record.

[Stark]

I will admitt that reading N&P on SDN frequently makes me want to grow a moustache, so that I can twirl it when posting. I'd need a monocle and a top hat to complete the ensemble though.

Reading about European economic policy just confuses me. 'Do you expect that to work' etc.

But there are other options beyond the US and EU extremes.

[Starglider]

But there are other options beyond the US and EU extremes.

Extremes? Seriously? I confess that since you adopted your smooth new low-profile trolling technique I have a harder time telling what your actual views are; keep it up, it's fun guessing. In this case though, come on, the financial policy and practices of the EU and US have been steadily converging for decades, in tandem with the ever closer coupling of financial markets and institutions in those regions. At this point they're both ultra-Keynesian, socialise-losses-and-privatise-gains playgrounds for rich elites. Political and regulatory capture is a bit more advanced in the US than northern Europe, but arguably the PIIGS are even further down the road to corruption than the US. The main difference is the flavor of PR used to pacify the electorate into re-electing the approved parties.

I find N&P amusing because I don't have to actually troll (which I generally don't enjoy) to get an 'OMG libertarian troll' reaction. For example, I completely agree with this analysis by what passes for the far left in the US of the state of the global economy. I disagree with many of the proposed solutions that site likes to feature, but I agree with the general theme that the system is thoroughly rotten and quite probably unsalvagable without the hardship and death toll Stas Bush was implying. On SDN though that's 'doomer talk' and the pool of acceptable viewpoints has narrowed to a dirty puddle of the worst kind of socialism; 'a bit more taxation and regulation will make everything ok'. It's annoying that problems such as unsustainable government and trade deficits are ignored, but what's worse is that 'more taxation and regulation' is now so thoroughly co-opted that it's actually handing elites tools to further increase wealth inequality and perpetuate the status quo.

As for my recently acquired merry bunch of Evil Ultracapitalist drinking buddies, the motives of regulation aren't really discussed since Everyone Knows (tm)(r) that it's just political appeasement gestures (see : hilarious failure of the EU stress tests to identify Dexia and the other banks currently on the verge of failure). What does get significant discussion is the ideas the legal & accounting people came up with to get around it and the consequences for trade structuring and hence algo programming.