Transcript Management of Developmental Asymmetrical Facial Growth

Successes and Failures in
Bank Privatization:
Lessons from Six Country
Case Studies
Alfredo Dammert and Esperanza Lasagabaster
(SASFP)
A wave of financial liberalization has swept
across the world since the 1970s, reversing
trends of high state intervention.
Liberalization has occurred in all its
dimensions:
elimination of credit controls and interest rate
ceilings, sale of state-owned banks, entry of new
private banks …..
Despite these positive trends, public
ownership of banks remains well entrenched
in some countries, especially in South Asia,
some regions in Africa, and the Middle East.
Wide public ownership impedes the
development of efficient financial markets.
Empirical literature supports these findings,
e.g., La Porta, Lopez-de-Silanes, and Shleifer
(2000) and Barth, Caprio, and Levine (2001).
Although there are real advantages to private
ownership of banks, a mere change of hands
has not always yielded positive results, and in
some cases, it has even been followed by a
crisis.
The critical policy question emerges of how to
privatize banks while avoiding the risks
inherent in the process.
This presentation examines factors that are
bound to make bank privatization succeed or
fail, drawing on different country experiences,
especially, Argentina, Brazil, Latvia, Mexico,
Mozambique, and Poland.
The presentation is divided in three sections:
Strategies for bank privatization
The importance of a strong regulatory framework
to support lending by the newly privatized banks.
The political economy of bank privatization
I. Strategies for bank privatization
State banks can be privatized in many ways—by
focusing on a strategic investor; on wide
ownership through IPOs, vouchers; and/or
transfer to staff.
The approach selected is critical:
It will affect the bank’s governance structure
and opportunities for introducing new
technology, modern banking skills, and fresh
capital.
I. Bank privatization strategies
Summary table
Key
Method
Country
Advantage
Disadvantage
Strategic
Investor
Argentina,
Brazil
New corporate
governance
Politically
controversial
Limited to
local
strategic
investor
Mexico
Less political
opposition
Constraints on:
skills transfer
capital injection
I. Bank privatization of strategies
Summary table (continued)
Key
Country
Method
Advantage
Disadvantage
IPO
More political
support
Diffused ownership
Poland
New capital
Voucher
Employee
Czech
Repub.
Russia
No new skills
Potential capital
market growth
Requires supporting
capital market
infrastructure
More political
support
Diffused ownership
No new skills
Politically
expedient
Diffused ownership
No new skills
I.a. Poland’s case
Privatization process was slow, strategy
changed frequently, and at times reflected
inconsistent objectives.
State zeal to retain influence came at odds
with the search for a strategic investor that
would a minority but actively participate in
management.
Strategy also emphasized IPOs aimed at
domestic investors to gain political support
and foster local capital market development.
I.a. Poland’s case. Bank Slaski
The privatization of Bank Slaski highlighted
IPO problems in a nascent capital market.
Initially, the sale comprised a mix of IPO with
a strategic investor.
The tender was cancelled posing a problem in
setting the IPO reference price.
Unexpectedly, an agreement was reached
with ING.
I.a. Poland’s case. Bank Slaski
The IPO price was set at a low level, leading
to a large oversubscription
Inexperienced Polish brokerage houses were
unable to complete registration of shares
before first day of trading.
Share prices skyrocketed
New investors were disgruntled and a public
inquiry followed.
Circumstances of Bank Slaski’s sale did not
help public support for the privatization
process.
I. Bank privatization strategies
A mixed privatization model has often been
used to draw on the advantages of each
approach.
In a mixed model, the role of the strategic
investor is still critical and its selection should
follow a transparent and rigorous process
Open to foreign investors
Government due diligence of new owners
I. Privatization strategies:
Should a government restructure a bank
prior to its sale?
This is an important policy question
Restructuring may delay privatization,
demand specialized human resources, and
force to government to recognize up-front the
bad portfolio.
Selling a bank with a bad portfolio detracts
sound investors who do not want to chase
after bad debtors.
I. Privatization strategies:
restructuring options prior to sale
Key method
Country
Outcome
Modest
restructuring
Mozambique
Contributed to bad
performance of sold bank
Internal
restructuring
Poland
Separate good
vs. bad bank
Argentina
Liquidation and
Nicaragua
selective branch sale
Privatization delays
Weaker portfolio of
sold bank
Faster privatization
Greater public effort in
tackling bad loans
Up-front loss recognition
Save few good assets
II. Weak financial regulation/supervision at
the heart of many failed bank privatizations
A shift from a state-dominated banking sector to
a private system in a liberalized environment
requires a strong supporting infrastructure to
protect the stability of the new system.
Most countries implementing such far-reaching
reforms –Mexico, Chile, and Mozambique as well
as most transition economies—neglected or
relegated to a second stage matters necessary
for markets to function properly…...
II. Weak financial regulation/supervision at
the heart of many failed bank privatizations
A few years after privatization, many entities
were experiencing financial distress
(Mozambique) and this often spread into a
systemic crisis (Mexico, Latvia).
Ex-post, countries realized that the building
blocks were missing: regulations were weak,
supervision was lax.
Markets were not fully developed, and regulatory
and supervisory provisions were all the more
important.
II.a. Mexico’s case: a hasty privatization
coupled with weak regulations
The 1992 privatization process was hasty. In 15
months, 18 commercial banks were sold for
US$12.5 billion.
The sale was initially hailed as a great success,
especially for the high prices fetched.
Controlling shares were all sold to domestic
groups, mostly to securities brokerage houses.
Foreign participation that could have brought new
skills and capital was explicitly restricted.
II.a Mexico’s case: a hasty privatization
coupled with weak regulations (continued)
The government had not performed sufficient
due diligence. In some cases, owners borrowed
to acquire the banks—bringing debt not capital.
A lending boom followed the privatization,
portfolios quickly deteriorated. Lending was
supported by foreign borrowing exposing banks
to high exchange and interest rates risks.
Regulatory changes introduced in 1990 were
inadequate. Only in 1994 did supervision start to
receive more attention.
II.a Mexico’s case: a hasty privatization
coupled with weak regulations (continued)
The 1994 devaluation proved disastrous given
exchange and interest rate risks.
The government responded to the crisis with
various programs that avoided depositors’ lost of
trust but at high fiscal costs. Overall, crisis
resolution was protracted increasing its costs.
Mexico’s unfortunate experience highlights the
importance of conducting privatization in a sound
regulatory and supervisory environment.
III. Political economy of bank privatization
Building political momentum for privatization is
challenging.
At times, privatization only came about after state
banks suffered mounting losses.
In other cases, an economic crisis and the resolve
to renew economic growth marked the turning
point.
III. Political economy of bank privatization
Privatization of provincial and state banks in
Argentina and Brazil was an arduous task.
The great divide between benefits drawn by local
governments and the costs imposed on the
nation at large exacerbated the governance
problem, perpetuating a vicious circle of bad
financial performance by state banks followed by
central bank or federal support.
Privatization was only possible after
recapitalization costs of distressed banks were
transferred to the owners—provinces and states.
III. Political economy of bank
privatization: relaxing constraints.
Political obstacles often explain privatization
strategies, e.g., including a small share of IPOs to
allow wider ownership.
Labor’s acceptance of privatization is central.
To ease labor constraints, governments have
compensated laid off workers,
established limits on the number of workers that can
be laid off,
transferred or sold a percentage of shares to workers,
at a discount (Poland), and in Russia, a more massive
transfer of assets took place but with a poor outcome.
III. Political economy of bank
privatization: relaxing constraints.
The sale of provincial and state banks in
Argentina and Brazil involved a special dimension.
Federal governments played a key role in easing
the financial costs of privatization for the states
and provinces.
In Argentina, for example, provinces led the sales
and assumed short-term costs related to bank
clean up, but the federal government created a
fund to on-lend to the provinces and transform
these short-term costs into long-term debt.
Summing up…...
Privatization can lead to greater efficiency but
ownership transfer does not always guarantee
good performance.
Regulatory and supervisory weaknesses have
been at the root of many privatization failures
(e.g., Mexico, Mozambique, and Latvia).
Successful privatization requires a well-developed
and coherent strategy.
Strategic investors can play a key role in
improving the bank’s governance but a stringent
pre-qualification process is necessary.
Summing up…...
Foreign investors can bring fresh capital and
skills, especially important in financial systems
that were previously dominated by state
participation where local players enjoy little
banking experience.
The separation of the good from the bad bank is
paramount.