Why Do Government Banks Perform Worse? —A Political Interference View 1

TYPO Sample period: – In the abstract: during 1993~2007. – In the Introduction (page 4): during the period 2003~2007 2

Key idea: Political interference This paper defines the political interference as the situation in which the executives of government banks are replaced within 12 months after the presidential elections. This paper tests whether the political interference causes GOB effect. That is, the poor performance of government-owned bank is caused by political interference. 3

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Sample size of government-owned banks (GOBs) relative to private- owned banks (POBs) The numbers of political banks is 18 (0.56%, relative to POB)and 62 (2.7%,relative to POB) in DCs and LDCs, respectively, making the total number of political banks be 80. 5

Suggestions to the problem of small number of political banks Case studies? – In particular, the channel through which the “political interference caused poor performances” – Separate the cases into those in developing countries and developed countries Test the significance of political interference Different definitions of political interference – This paper considers only the presidential election years and the executive turnovers for GOBs after the elections. – Consider election years (might be months after the election) to measure the political interferences and compare the changes in bank performances for both GOBs and POBs. 6

7 Performance Comparison: Political GOB versus POB Performance Comparison: Non-Political GOB versus POB

Question 1: causality issue Brown and Dinç (2005) supported that failing banks are much less likely to lose their licenses or be taken over by the government before elections than afterwards. They thus argued that much of the within-country clustering in emerging market bank failures results directly from political concerns. This paper considers only the presidential election years and the executive turnovers after the elections. – Could the government replace bank executives within 12 months after the presidential elections because of poor bank performances? 8

Question 1: causality issue (continue) Could the credit ratings of GOB be poorer than those of POB? Could the credit ratings of political banks be poorer than those of Non-Political GOB ? 9

Cross-sectional comparison versus time series comparison 10 DGOB equals 1 in the case of a government owned bank and 0 otherwise. Could DGOB be equal to 1 after the political interference and zero before the political interference?

Question 2: Why do government interfere banks? The influences of political interferences are much larger in developing countries than in developed countries. This paper suggests that, in developing countries, government banks undertake more political interferences while in developed countries they do not – Could the level of corruption and /or creditor rights (Regulatory Environment) affect the political interferences 11

Interaction terms and their interpretations 12