Privatization and Bank Liquidity Creation

Abstract

We address privatization using data on over 4,000 banks from 56 countries/regions over 15 years. We use bank liquidity creation that measures bank output and input comprehensively. Findings suggest that privatization effectively shifts bank ownership and control to private-sector firms. Potential benefits for society include guidance by Adam Smith’s (1776) “invisible hand” that exceed benefits from “soft budget constraints” allowing state-owned banks superior access to government equity capital and liquid funds inputs. Results are robust to numerous econometric checks, augmented by findings that banks are safer after privatization, and intensified in nations with higher institutional quality, better regulation, and more competition. Privatization for banks is previously understudied, and the issues regarding equity capital and liquid funds inputs were previously uninvestigated.

Presented by Allen Berger.