The Corporate Governance of Public Banks before and after the Global Financial Crisis

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 privatized its extensive public banking sector over the past decades; Spain that had problems with its savings banks during the crisis, 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 public banks and how the privatization of public banks in Spain and Italy can inform the debate in Germany and in other European 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 political interference.• Bank privatization must be underpinned with real reform of banks' governing bodies, restricting public-sector influence.

The Impact of Corporate Sustainability and Digitalization on International Banks’ Performance

“…The 2008 financial crisis was an example of the financial industry's significance for economic development. However, the bailouts by the public sector and the subsequent macroeconomic shocks (Hallerberg and Markgraf, 2018) prompted social aversion to banks and severely damaged their reputations (Ruiz et al, 2014). Since then, many banks have engaged in CS initiatives to restore tarnished reputations (Forcadell and Aracil, 2017a;Mattila et al, 2010).…”

Strong Firms, Weak Banks: The Financial Consequences of Germany’s Export-Led Growth Model

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Strong Firms, Weak Banks: The Financial Consequences of Germany's Export-Led Growth Model

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