State-Owned Banks: Do They Promote or Depress Financial Development and Economic Growth?

Abstract

This paper surveys the theoretical and empirical literature on the role of state-owned banks and also presents some new results and a robustness analysis. After having discussed whether there is a theoretical justification for the presence of state-owned banks, the paper focuses on their performance. Three basic facts emerge: (i) state-owned banks located in developing countries are characterized by lower profitability than comparable privately owned banks; (ii) there is no evidence that the presence of state-owned banks promotes economic growth or financial development; and (iii) the evidence that state-owned banks lead to lower growth and financial development is not as strong as previously thought. The paper concludes that we still do not know enough to pass a final judgment on the role of state-owned banks and hence more research is needed.

Keywords: Banking, privatization, state-owned banks, financial development, Latin America

JEL Classification: G21, H11, O16