2 Jun 2017 11:00am

Debate: should all banks be nationalised?

Nearly ten years on from the global financial crisis which saw several financial institutions come into public ownership, industry professionals outline the case for and against nationalising all banks

Caption: Industry professionals outline the case for and against nationalising all banks.

Dorothea Schäfer, research director financial markets at the German Institute of Economic Research DIW Berlin

“In the financial crisis the failure of banks threatened the wealth of nations all over the world. Taxpayers were required to rescue failing mega banks. This implicit nationalisation is particularly unfortunate since it supports privatising profits and socialising losses.

“Nationalisation may indeed put pressure on the culture of extreme performance bonuses in the financial sector since the justifying argument of facing the risk of failure will not be available. 

“However, another severe problem would arise. The banking sector would become even more uniform, populated by only one type, the nationalised (mega) bank.

“Usually diversity increases a system’s probability of successfully absorbing shocks and of being independently able to return to a steady state. Will a system consisting of just a few national mega banks perform better than a system in which many bank types – be they private or public, large or small, primarily wholesale funded or deposit-funded, locally oriented or internationally active – share the market?

“If the diversity paradigm – known from ecological systems – holds, many bank types sharing the market may increase resilience and, thus, may rule out nationalisation of all banks as the preferable option.”

Anna Bligh, head of the Australian Bankers’ Association

“Banks in Australia are under an unprecedented level of pressure and scrutiny. There is a direct correlation between the implosion of trust and the explosion of scrutiny.

“Banks understand they are swimming against the tide of powerful global forces that can be extremely dispiriting.

“But none of us can afford to give up on the goal of our banks winning back the trust of their customers and the public because that trust is integral to the banks and to all sectors in the new environment in which we all operate.”

Christos Triantopoulos, research fellow, Centre of Planning and Economic Research (KEPE) in Athens

“The nationalisation of banks is like a two-edged sword. On the one side, the state as an entrepreneur has been proved inefficient, especially regarding the allocation of resources through the banking system. State ownership and intervention contributes to the macroeconomic deterioration by fuelling fiscal expansion and ‘breaking’ the monetary transmission channels.

“On the other side, financial liberalisation may easily lead to a condition of financial euphoria that cannot be adequately followed by the state. In such an environment the ‘toxic’ dimension of a sophisticated and over-leveraged financial system may grow, creating the field for a financial crisis.

“The state, along with its independent agencies, must hold a regulatory and supervisory role, holding – in theory – the card of (temporary) nationalisation of banks only for times of strong financial turmoil.

“The best way to solve this difficult equation is through the establishment of a framework that includes banking regulation, supervision, bail
(in and out), resolution, and deposits guarantee, without the state’s direct involvement.”

Charan Singh, RBI chair professor of economics at the Indian Institute of Management

“The era of social banking is over; inefficient government banks should be sold off. The question is how to go about doing it. Given that taxpayers’ money is at stake, there is a need to establish very high standards; or else privatisation should be an alternative”

Louis-Philippe Rochon, professor of economics at Laurentian University, Canada

“Many have argued that banks were responsible for the financial crisis and, as such, deep reforms are needed, even raising the possibility of nationalising the banking system. This analysis is at best naïve.

“There is no doubt banks behaved badly, and broke the public trust by behaving in a way that threatened the stability of the economic system.

“But while it is true that there have been abuses, the solution is not to nationalise the banking system. I am not opposed to having one public bank, while also ensuring that banks fulfill their important role as purveyors of credit.

“After all, the banking system was very much well behaved under the Glass-Steagall Act, for instance. We must therefore aim to reinstall many of the regulations, such as distinct separation between commercial and investment banking, strict rules on financial derivatives, to name a few.”

Matt Stoller, fellow at the Open Markets Program at New America, on Twitter

“I don’t think nationalisation is a good model here. RBS should be broken up into lots of smaller banks.”

Philip Booth, senior academic fellow at the Institute of Economic Affairs, UK

“The idea that banks are too important to be left to the market is an illogical one. The most important things in life, such as food, housing and clothing are provided by markets. Is there something specific about banks that should lead them to be nationalised? The answer is ‘no’.

“Banks give rise to systemic risk – if one falls, all banks might be endangered. But there are methods of dealing with this. The most important is a mechanism for ensuring that banks can be wound up safely. The provision of such a legal framework is the most important responsibility of the state when it comes to banks.

“The semi-nationalised mortgage securitisation warehouses in the US were a disaster. The Slovenian banking system – more or less fully nationalised – suffered every bit as much as any other system during the crisis. And this is not surprising. When people take risks with other people’s money, they are not likely to be careful.

“There is a long history of nationalised banks losing money. The key to a stable system is to ensure that private banks do not have access to taxpayers’ money through bailouts and to ensure that banks can be wound up safely.”

Guillaume Vallet, associate professor of economics at Université de Grenoble-Alpes, France

“It’s not possible to consider banks only as private institutions, and even to talk solely about nationalisation as a solution. We should think about the following questions reaching a conclusion:

“1. Does a monetary ecosystem function better when there is only one kind of actor?

2. Does the nature of ownership matter when channeling credit?

3. Is there a distinction between the ownership of money and its uses?

4. Who should be in charge regarding the expertise and distribution of banking resources?

5. How do we deal with the asymmetry of information?

6. Do market incentives matter in the allowance of banking resources?

7. Is it possible to nationalise banks without nationalising companies that need access to money?

8. How do we provide the best answer to future global economic challenges?

9. What ethical angle should be considered?

10. How can we improve banks’ accountability towards society as a whole?

“Answers to these questions should make clear that there exists an important difference between nationalisation and increased state regulations in the banking system.”