The Impact of State Ownership on Performance Differences in Privately-Owned Versus State-Owned Banks : An International Comparison

This paper employs cash flow and accounting based measures to examine performance differences between privately-owned and state-owned banks in sixteen Far East countries from 1989 through 2004, a period including the 1997 Asian financial crisis. We find that state-owned banks operated less profitably, held less core capital, and had greater credit risk than privately-owned banks prior to 2001, and the performance differences are more significant in those countries with greater government involvement and political corruption in the banking system. In addition, from 1997 to 2000, the 4-year period after the beginning of the Asian financial crisis, the deterioration in the cash flow returns, core capital and credit quality of state-owned banks was significantly greater than that of privately-owned banks, and the contrast between the two types of banks during this period is especially sharp for the countries that were hardest hit by the Asian crisis. We also find that state-owned banks finance the government to a greater degree than do privately-owned banks in countries where the government is involved heavily in the banking system. However, state-owned banks closed the gap with privately-owned banks on cash flow returns, core capital, and nonperforming loans in the post-crisis period of 2001-2004. Taken together, our findings can best be explained by Shleifer and Vishny's (1997) corporate governance theory on government ownership of banks and Kane's (2000) life-cycle model of a regulation-induced banking crisis