What do nationalized banks do?

Should Europe’s banks be nationalized? Here are two contrasting papers. First (via Mahalanobis) Harald Hau and Marcel Thum show that (pdf), in Germany, state-owned banks have done especially badly:

The 29 largest German banks show a systematic underperformance of state-owned banks in the recent banking crisis. Adjusted for size, asset write-downs and losses from the first quarter of 2007 to the third quarter of 2008 are on average three times as large for state-owned banks compared to privately owned banks…
Bank losses during the financial crisis correlate with the financial (in-)competence of supervisory boards. A lack of competent board monitoring is therefore our leading explanation for underperformance of state banks.

On the other hand, there’s this:

If anything, government ownership of banks has been robustly associated with higher long run growth rates

One reason for this, they suggest, is that private high-tech banking diverts banking activity away from growth-enhancing lending, and attracts highly able people into rent-seeking jobs and away from more socially productive ones.
Personally, I suspect there are reasons to doubt the wider relevance of the Hau and Thum paper:
1. Before the crisis, no-one in politics paid much attention to banking, and so politicians might have been slack about appointing supervisory board members. The crisis should have taught them to be more careful.
2. If nationalized banks exist alongside private ones, able board members might prefer to work in the private sector, leaving the duffers for the nationalized sector. However, if all banks were nationalized, better board members wouldn’t have such an attractive alternative.
3. If, despite 1 and 2, governments are still unable to appoint good board members, this is not just an argument against nationalizing banks. It’s also a reason to be sceptical about the efficacy of regulation. After all, if governments can’t appoint good directors, how can it appoint good regulators?
The question, then, remains open: why should we assume that nationalizing the banks is an inferior option to “better regulation” and/or to some kind of bank levy?

Comments

[Prateekbuch]

Just to clarify - were these underperforming banks nationalised before, during or after the period in question? Could it not be that the banks were underperforming, therefore nationalised, and then continued to be rubbish by dint of point #1...?

[Brian, follower of Deornoth]

"Should Europe’s banks be nationalized?"

Only if you want to hand complete control over your life to the State.

[Left Outside]

Could the write down from state banks have been agreed upon and dealt with mroe quickly than in the private sector. Perhaps they just look worse now becuase they've admitted more now. Stronger supervision may have foreced this, or a more explicit guarantee may have made them less shy.

With private versus public banks, as with the French Revolution, it may just be too soon to tell.

[Alex]

Er, how about the profit motive?

[L]

@Chris, you are aware aren't you that British companies (banks included) don't have supervisory boards:

http://en.wikipedia.org/wiki/Supervisory_board

[chris]

@L - of course, I am so aware - I'm referring to the German position.
@ Alex - it's the profit motive - plus some mix of agency problems and bounded rationality/knowledge that got us into this mess. In the presence of those problems, a little less profit motive might not be a bad thing.
@ Prateekbuch - the banks were state-owned long before the current crisis.
I'd add that there are loads of ways of organizing nationalized banks - a question that doesn't get as much attention as it should.

[Mitchell Powell]

Thanks to the way central banking works throughout the world, the banks are de facto, nationalized anyhow, because central control makes them in essence branches of the central banking. As long as central banking (a la Federal Reserve) continues to exist, questions about who "owns" banks are really questions of how--not whether--government should run banks.

[Alex]

Yes, but the profit motive is also what gets the banks to lend and invest and take deposits and so on like they've been doing for centuries to the benefit of civilization. Yes crises happen, but Michael Foot is not the solution.

[Oranjd]

Alex, a publicly-owned banking sector does not imply an absence of the profit motive - rather that maximisation of profit is likely to be undermined by democratic pressures for the accounting of costs (social, environmental, etc.) that private banks externalise.

[Fred Kapoor]

This is a very interesting and at the same time broad topic that might take thousands of articles to be covered. It is great to read a good article about it every now and then. I personally agree with @Oranjd "wned banking sector does not imply an absence of the profit motive " and this is not always consider by everyone.