Can experience of nationalization of banks in Great Britain be used in East-European countries?
By Vasyl Khomiak
As all of You well know nationalization is one of the classic instruments of government in the time of cries for stabilizing economical situation. This instrument was used by Britain Government in the 8-th of October. Near 50 bln pounds were allotted from government to the banks. 25 bln pounds were received by the leading banks: Abbey, Barclays, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered.
As leaders of the government explained, this was the only way out for stabilization of the banking system. Government bought preferred shares of the banks in trouble. Minister of Finance Alister Darling claimed that Government wouldn’t manage banks, only give them support.
It gives positive effects for avoiding bankruptcies of banks and for suspending decline of stock market. Also stability in banking system gives a good chance for minimizing reduction in the industry.
As about negative effects, traditionally, investors do not prefer to come to the sectors that have government’s shares. But in the time of crises stability is more important then growth of investments.
I think, nationalization in the time of crises is a useful action. It gives opportunity for supporting banking system. It accordingly gives opportunity to save economy and to avoid panic.
Will such instrument work in the East-European countries?
In the time of crisis policy of government should be directed to the 3 main tasks:
- Saving wages for people who work in budget sphere and social subsidies;
- Guarantee stability of the banking system and avoiding considerable devaluation of national currency
- Avoiding reduction of unemployment and of GDP.
First task should be realized by government with the help of the fiscal policy. But second and third tasks can not be realized without government’s intervention to the market.
Nationalization is one of the possible ways to solve second and third tasks. So, I propose to discuss: should government of your country nationalize banks in the time of crises or shouldn’t?
For avoiding devaluation of Hrivya, National Bank of Ukraine can extend quality of US dollars injections. For stability of the banking system, the National Bank should support liquidity of banks with credits or with buying preferred shares (Using British experience or in other words – make formal nationalization).
I don’t believe that it gives some result in Ukraine (also in the rest countries of east Europe).
“Weak or formal nationalization” (government buys shares but in fact does not manage banks) can be effective in Britain or Europe. British government fells certain that banks using government trenches and money from selling shares will support industry and business with credits.
But I do not believe this will work for Ukraine. Nationalization of banks can be really effective method for supporting economy. But this nationalization should be ”full”, in other words, government should manage leading banks in the case of their problems with liquidity. We have already had a lot of examples when commercial banks receiving cheap US dollar credits for supporting Hrivya used it for speculation and even crediting other foreign banks outside of Ukraine.
Conclusion: In my opinion, government should nationalize some banks in trouble and realize government policy in such way. Giving cheap credits to banks is the same as throwing money to the black hall.
December 8th, 2008 at 6:32 pm
I think the nationalization is the worst outcome; I would not like my savings to appear in some government institution be it bank or anything else. We all know too well how the government owned enterprises of any kind operate. I also think that injecting money by the Central Bank to any commercial bank is a serious incentive problem not only for that particular bank but also for the financial sector as a whole: each bank expects that taking too much risk is actually rewarded rather than punished. This directly affects the risk of future crisis. I do not think it is a good idea to solve current problem by laying ground for future problem.
December 8th, 2008 at 8:16 pm
It seems that Fannie and Freddie were failed at birth. They were in fact the privileged child, encouraged to play recklessly with their lavish allowance. Endowed with an ‘implied’ government guarantee, they were given favoured access to cheap capital and were too ‘close’ to government.
Nationalization can only create a new Fannies and Freddies, and price of nationalization may become too huge for our society in the long run. On the contrary, free market correction would be more painful, but far more healthy.
December 8th, 2008 at 11:18 pm
Nationalzation can be extremally dangerous in the long run, not only economically but also politically. However if it will be difficult for the government to handle the crises without doing so. Therefore I believe that it is neccessary to privatize nationalized entities after crises is over…
December 9th, 2008 at 10:50 am
And new owners of the banks who were nationalized during the crisis will always know that if they fail, they will be just nationalized once again and will easily get away with their profligacy..quite dreadful isn’t it?
December 9th, 2008 at 6:25 pm
Well, in my opinion if we nationalize commercial banks in a way that the author of this article proposed, we run a risk to transform banking into totally inefficient sector as it is in today’s China.
I think it is enough to illustrate specifics of Chinese banking sector to give convincing arguments against nationalizing banking sector with the managing right given to the state. Chinese banks are state-owned and have a strong tendency to accumulate non-performing loans. This is because managers of the bank simply do not care, whether loan-taker is creditworthy or not. Therefore banks often extend loans to the state-owned enterprises that are bankrupt or nearly bankrupt. As a consequence loans are not repaid and this inflates the volume of the non-performing loans even further. At some point non-performing loans were estimated to be 40% of total loans made by Chinese banks (!).
There were several bank recapitalization waves ran by Chinese government with the aim to remove non-performing loans from Chinese banking sector, however after the process was over and old non-performing loans were liquidated, new ones were starting to appear. This situation is a direct consequence of state-ownership.
The nationalization plan that was conducted by UK government that included state participation in bank capital through preferred stock can be regarded less harmful for the banking sector, since it only raises concerns for “moral hazard”: a bank manager starts thinking that even if he overspends or adopts risky projects, state with its “huge budget” is ready to help. Theoretically this may give a rise to another banking crisis and that is an obvious disadvantage, however on the other hand state is restricted from participating in the management of the bank and the only thing state gets from buying preferred stock is a claim to a bank’s net income. There may be conflicting opinions about this method as well. Personally I also think that this is hardly the best way to overcome the crisis, but as compared to the situation, when state owns controlling share of a bank, this approach seems more acceptable.
December 10th, 2008 at 1:19 pm
To my mind nationalization of commercial banks is not an appropriate action in this situation, most valuable one is to create control system, may be special department, which enables governments to control the flow of their money via the commercial banks, in order to control the inflation rate. The banks can credit only the business projects which have positive effects on the economy development in the long ran.
If we consider Georgian example, Georgian people don’t trust their government, which weekly changes its ministers and God knows what will be the future, so if private banks nationalized, the depositors will withdraw their money and the banks will go bankrupt, even government assistance can’t aid it.
December 10th, 2008 at 10:24 pm
I agree to David. In my opinion he is a hundred percent right. Georgian people do not trust their government too much, they even do not trust banks as well , because of the issue which happened in 90s…. So if the private banks nationalized, that will have disasterous result for the bakns and for the economy. The depositors will withdraw their money and in that case even govermental aid will be in vain.
December 20th, 2008 at 6:14 pm
I think this is a very difficult issue to discuss. We are talking about nationalization of banks in European countries. It all depends of situation in the country. In Great Britain it may works, because people trust their government, but it does not means it will work in other European countries, too. For example, David says here that Georgian people don’t trust their government, which weekly changes its ministers and God knows what will be the future and it would be unefficient here to nationalize banks. I think we must think of different options. Every country should take decision and act only after analyzing the situation.
January 4th, 2009 at 2:47 pm
This is a global problem and cannot be solved by the decision of one country, especially, Georgia. Speaking about Georgia, we should bear in mind that majority of banks operating in Georgia are own by foreigners - HSBC, Bank Republic, VTB, BTA, Halik Bank, etc. And the nationalization of foreign property is always atributed to a huge distrust to the government from the investors. For example, Iran have nationalized oil industry after 1978 revolution, Venezuela permanently broadens the sectors of nationalization. These countries are unfavourable for the investors and that is why their economic development is much lower than the rest of the countries.
When speaking about nationalization of foreign investment legal basis and outcomes should also be taken into account. According to the principles established in international law overriding public interest, non-discriminatory approach and “prompt, adequate and effective” compensation are the necessary preconditions for the nationalization. However, I do not think that it is favourable for Georgian government to buy the banks and spend a lot of money on it.
I think that temporary strict regulations for the banks is a better solution. Another way out can be the temporal extension of power of the State Regulators - National Bank, Monetary Supervisory Agency, Financial Monitoring Service.
January 6th, 2009 at 10:55 am
I don’t agree with Vasyl that investment growth is less important than stability – stable state can never develop without investments and investments can hardly be attracted in unstable country. Stability can be ensured by financial aid, not interfering in ownership. In case of Great Britain, state purchased “preferred stocks” (without voting rights), meaning it does not interfere in decision-making process.
I do believe Georgian government better give long-term loans with low interest rate to commercial banks (that experience financial difficulties) than nationalize them. It will ensure banks’ independence from state. As for argument about using these funds for speculation purposes, I believe current conjuncture does not give commercial sector to act this way – consequences can be much harmful than it is now.
January 9th, 2009 at 1:11 am
It is well-understandable that stable state can never develop without investments and investment growth is very important. But on each stage of increasing or decreasing of our economy, in case of resistance or rally government should change their priorities and policy.
During the time of rally and increasing government should stimulate investments and develop industry. But in the time of cries as priority, firs of all, government should support subsidies, support usual people and protect nation. If our budget gives us such possibility, we should support make investments and support investment growth. But in the time of cries government should protect people and letter investment growth.
January 9th, 2009 at 10:17 am
I agree government should protect taxpayers, but I doubt whether only subsidies will stabilize situation. Government aid should be made in a manner money not to be thrown away but spent for investments, as Vasyl said (even small ones will do), and encourage small entrepreneurship – main source of wealth generation.
January 9th, 2009 at 7:13 pm
Lasha, I agree that only subsidies will not stabilize situation. But without it many people could not survive the time of cries, unemployed would not have any other possibilities except emigration or finding illegal methods for survivability. As, for example in Ukraine, budget resources are very limited, so government should select: protect subsidies or cut social payments and support industry. In the time of cries , at my opinion, government should select first.
You are right theoretically: “encourage small entrepreneurship – main source of wealth generation”. But on the example of Ukraine it does not work. In fact, we do not have small entrepreneurship in the cause of corruption. So, as we had not had it before cries, we could not loose it now))
I am happy if you have another situation in Georgia)
January 12th, 2009 at 11:32 am
Vasyl, I hope Ukrainian government will take wise decision and protect its people by financial aid. I also hope it will overcome problems connected to corruption and soon you will have opportunities for developing small entrepreneurship like it is in Georgia (very limited, hard, but still existing).
July 5th, 2009 at 2:06 am
Topic of your article is very interesting, i have bookmarked your blog
regards
fluflaken
August 25th, 2009 at 4:51 am
Круто. А инфу не с ЖЖ случайно взяли?
September 13th, 2009 at 7:22 pm
is there any way of emailing all banks and building soc in the u.k at the same time to find out who olds my great grand fathers oil shares paid for from 1913/14 and finished in 1919 thank you
March 15th, 2010 at 9:06 am
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