The banking and capital markets of the world’s developed economies are the ultimate expression of free market capitalism: wasteful, inefficient, prone to ludicrous excess in providing capital at the wrong price to the wrong users and then to periodic panic and failure. Time and again, the free market shows itself to be the worst system of capital allocation... with the possible exception of all the others.
The most recent market failure has once again sent the champions of free markets pleading for state bailouts, which politicians, fearful of a voter backlash, have happily used voters’ own money to provide. Nationalization of a failed bank in the UK and provision of state financing for its wobbling peers, US public funds used to guarantee the liabilities of a failing investment bank: these are supposed to be temporary solutions. In fact, they reveal just how closely the hand of the state always rests behind the supposed free market in money.
Beyond its use as a temporary measure, can state ownership of banks work? Most western-trained economists, financiers and policymakers will still scream: "No". They equate state ownership with sleepy, bureaucratic institutions, attracting deposits only on the basis of their low risk, to recycle them in mispriced loans – typically to failing industries that politicians want to prop up to keep voters employed – and other bad risks.
However, the recent crisis among western banks raises the question: is that any worse than the obscene mess they have created?
Take a look at Russia. The country’s shock approach to privatization in the 1990s prompted banking crises in 1998 and 2004 that now leave it with an intriguingly mixed system. Big, state-owned universal banks dominate but jostle with private banks, foreign banks and a huge number of smaller regional banks – many privately owned and some state-owned – in the battle for share in retail and corporate loans and deposits.
Are the big state banks noticeably sleepier, more bureaucratic, worse at credit analysis, less capable of providing valuable and innovative financial products to retail and corporate customers? On balance, they probably are. The private banks have been smarter. It took a newcomer in 2002, Russian Standard Bank, to pioneer consumer finance at points of sale for white goods and other large purchases. The availability of such financing, based on credit scoring technology new to the country, has been a means for Russians to improve their living standards.
But the gap with state banks is not huge. The latter are profitable, with respectable returns on equity and cost-income ratios. And now they will benefit from the closing of western funding markets for Russian banks, a consequence of the crisis in the west, and grow their market share at the expense of the private banks that had been nibbling away at it.
Private banks could easily be pushed into the hands of state-owned banks, as Guta Bank was in 2004, when it was snapped up by Vneshtorgbank, and rebranded as VTB 24. The state-owned bank’s retail arm has recently been further boosted by the acquisition of retail loan portfolios and management from Russian Standard Bank.
If the Russian government wanted to mount a Yukos-style nationalization of more private banks tomorrow, it could do so with ease. The country goes its own way. It won’t be lectured on the primacy of free markets by the west, especially not now. It stopped listening years ago. But the presence of privately owned domestic and foreign banks gives the system some competitive zest.
The Russian government wants state-owned national banking champions to be proud of and has hired in private sector managers to boost Sberbank as a regional and even global player. Why should we assume that German Gref at Sberbank will do any worse a job than such western luminaries as, er, Chuck Prince and Marcel Ospel? Maybe he will do better.
Of course, state capitalism has more validity in a country such as Russia where the population is under-provided with simple banking products. For example, state-owned Russian Agricultural Bank reaches out to a numerous but thinly spread rural population, providing a mechanism of credit analysis and leverage in the handing out of state subsidies.
It’s to be hoped that approach increases the chances of those subsidies being well used. After seven and half years of stunning growth at the bank, its NPLs remain low.
Foreign banks might ponder the wisdom of trying to compete. Right now, as western banks grapple with more pressing problems, the plans of several for taking strategic stakes in Russian banks have been put on hold. In the end, however, foreign banks might have little choice. Russia has been enjoying Chinese-style growth rates of 7% to 8%, accumulating cash and wealth and becoming home to companies of global significance. If they want to offer their investors growth, western banks must be in these markets. Banks will find shareholders demanding it.
Well, those that still have private shareholders will.