The Impact of Government Ownership on Bank Risk and Lending Behaviour

Abstract

We use cross country data on a sample of 210 large Western European banks during the ten year period from 2000 to 2009 to evaluate the impact of government ownership on bank risk and lending activity across the economic and political cycles. Three main results emerge from our analysis. First, government-owned banks have a lower default risk but higher insolvency risk than private ones, indicating that they benefit from a government protection mechanism in the form of explicit and/or implicit guarantees. Second, government owned banks lending behavior across the economic cycle is not significantly different from the one of private banks. Finally, European government owned banks are subject to political influence and increase their lending more than private ones during election years. These results are all consistent with the political view of bank government ownership and have important policy implications for the recently nationalized European banks.

Keywords: European banking, Government ownership, Bank risk

JEL Classification: G15, G21, G28, G32