Policy Documents

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

Chung-Hua Shen and Chih-Yung Lin –
September 1, 2010

This study proposes a political interference hypothesis to explain how political considerations depress government banks performance. In here, we define the political interference as the situation in which the executives of government banks are replaced within 12 months after the presidential elections. We classify government banks into political and non-political banks when the government banks undertake and do not undertake political interferences, respectively. The hypothesis firstly suggests that once government banks undertake political interference, their financial performance deteriorates. That is, political banks display the worst performance, followed by non-political banks and private banks have the best performance. Next, these influences of political interferences are much larger in developing countries than in developed countries. Last, the underperformance of government banks will disappear if we remove these political interferences. By employing bank data from 100 countries during 1993-2007, our hypothesis effectively explain why government banks in developed countries escape relatively unscathed while those in developing countries suffer significantly