The Corporate Governance of Public Banks before and after the Global Financial Crisis
| Author | Jonas Markgraf,Mark Hallerberg |
| Published date | 01 June 2018 |
| DOI | http://doi.org/10.1111/1758-5899.12562 |
| Date | 01 June 2018 |
The Corporate Governance of Public Banks
before and after the Global Financial Crisis
Mark Hallerberg and Jonas Markgraf
Hertie School of Governance
Abstract
During the 2008–09 financial crisis, many states were forced to nationalize faltering private banks. But also public banks ran
into trouble and market actors continue to worry about their stability and crisis resilience. During the crisis, German public
Landesbanken and Spanish public Cajas were hit hard. Yet, German public Sparkassen emerged strengthened from the crisis.
This calls for a closer examination of the regulatory framework and corporate governance of public banks. We compare how
corporate governance choices affected the financial crisis performance of public banks in three countries. Italy that had priva-
tized its extensive public banking sector over the past decades; Spain that had problems with its savings banks during the cri-
sis, which were eventually privatized or shut down; and Germany whose public savings banks navigated the financial crisis
relatively well while its public Landesbanken got into serious trouble, and where calls for privatizing public banks resurface
periodically. The paper considers the question whether Italy’s banking crisis is partly rooted in the legacies of its formerly pub-
lic banks and how the privatization of public banks in Spain and Italy can inform the debate in Germany and in other Euro-
pean Union countries with significant public banking sectors.
Policy Implications
•Regulators should be concerned with how public-sector influence affects whether a bank maximizes profit and hence the
likelihood that a bank will need to be resolved.
•Public-sector banks’operations should be strictly regulated to moderate implications of political interference in bank
governance.
•The bank management of public-sector banks should have sufficient autonomy from the supervisory board to limit politi-
cal interference.
•Bank privatization must be underpinned with real reform of banks’governing bodies, restricting public-sector influence.
1. Publicly controlled banks in the global financial
crisis
The bank bailouts in many European countries during the
2007–09 global financial crisis, once again, demonstrated
that the banking sector can become an economic burden
for public finances and a political burden for politicians. An
insufficient regulatory framework and the lack of clear reso-
lution rules distorted incentives for bank managers in com-
mercial banks that took on unsustainable risk. However, not
only commercial banks toppled during the financial crisis:
the German state-owned Landesbanken ran into serious
trouble and the sector of publicly-controlled Cajas (savings
banks) in Spain was so devastated it literally disappeared.
Thus, public ownership was no bulwark to risk-taking of
banks and comes with its own implications for bank man-
ager’s incentive structures. Market actors continue to worry
about the propensity of public banks to get in trouble and
to threaten to increase the public debt burden. For example,
credit rating agencies, such as Standard and Poor’s, consider
public ownership of much of the banking sector in some
countries as a clear credit risk (Copelovitch et al., 2018). At
the same time, less internationalized municipality-owned
Sparkassen (savings banks), important creditors for small and
medium-sized enterprises and for individuals in Germany,
emerged unscathed from the financial crisis and were con-
sidered as possibly a risk-free banking model (Deeg and
Donnelly, 2016). This raises the question of risk-taking in
publicly-controlled financial institutions and under which
conditions state-owned financial institutions engaged in
risky bank activities. The role of public ownership of banks –
despite being a central characteristic of many European
banking sectors and a heavy burden for public finances for
some countries –has been strikingly missing in the post-cri-
sis debate about the causes of the financial crisis and was
hardly part of the debate about future banking regulation.
Large parts of the public-banking sector are excluded from
ECB’s supervision, rendering efficient internal governance
mechanisms all the more important.
In this paper, we explain the major features of (formerly)
publicly controlled banks in Germany, Italy, and Spain dur-
ing the build-up of the global financial crisis up until, 2014.
In all three countries, the public sector controlled a consid-
erable share of banks’assets but political interference took
Global Policy (2018) 9:Suppl.1 doi: 10.1111/1758-5899.12562 ©2018 University of Durham and John Wiley & Sons, Ltd.
Global Policy Volume 9 . Supplement 1 . June 2018 43
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