Privatization of the Banking Sector and Misallocation

Krisztina Orban, Economics PhD student

Is it possible to transform a country’s financial system from one that is a source of misallocation of resources into one that is a source of efficient allocation and finance-induced growth? I answer this question using an experiment of a large-scale bank privatization program that impacted the financial system of an entire country. The experiment is the transition period after the fall of communism. Ownership of banks belonged to the state during communism. After it ended, the comptroller prespecified a deadline by which state ownership in the financial sector had to be reduced to 25%. After the privatization episode of a bank, I look at how bank profitability and firm-level measures (as growth, productivity, employment, wages and most importantly, capital) changed for firms connected to the privatized bank. Further, having access to data on the universe of firms I am able to test whether there is any improvement in the resource allocation as a consequence of bank privatization.