'State banks corruption sources'

MANILA, Philippines - State-controlled banks are a breeding ground for corruption of elected and appointed government officials, financial regulatory authorities, and the courts, according to a World Bank report.

In the just-released report entitled “Global Financial Development Report 2013,” the World Bank warned governments about mishandling state-run financial institutions such as banks and pension funds.

In the Philippines, the leading state-run banking institutions are the Land Bank of the Philippines (LBP) and the Development Bank of the Philippines (DBP).

The biggest government pension funds are the Government Service Insurance System (GSIS) and the Social Security System (SSS), while the leading health insurance institutions are the Philippine Health Insurance Corp. (PhilHealth) and Home Development Mutual Fund (Pag-Ibig).

Charles Calomiris, one of the co-authors for the segment on state-run financial institutions of the global report, said that extensive studies show overwhelming proof of the negative effects of state-controlled banks on a nation’s banking system.

Calomiris, a Henry Kaufman professor of the Financial Institutions at Columbia University, said that there are three dominant reasons for “the dismal performance of state-controlled banks.”

The report said that government financial institutions do not have incentive programs similar to what private institutions offer.

State-run financial institutions tend not to be trained in credit analysis as well as the type of training for private bankers or financial executives.

“They face incentives that reward politically rather than economically motivated allocations of credit,” it added.

Second, the politically motivated allocation of funds to crony capitalists has adverse consequences on the political and social system of a region or country.

The World Bank report said that state-controlled financial institutions tend to stunt the growth of the economy and weaken core political and bureaucratic institutions.

It described government-run or controlled financial institutions as “loss-making machines” as these are not geared toward profitability or the aggressive enforcement of loan repayment, but rather toward rewarding political cronies with funding. The losses of state-controlled banks thus pose a major fiscal cost for governments.

“Those fiscal costs crowd out desirable government initiatives, and given the large size of the losses, can be a threat to the solvency of government and a source of inflationary deficit financing,” the voluminous report added.

Case in point was the Fannie and Freddie fiasco in the US in the late ’90s. The firms serviced low-income and underserved borrowers, but the supply of credit-worthy low-income and underserved borrowers was limited. Inevitably, lending standards were relaxed, and the losses mounted.

Political motivations likewise drove the Spanish cajas to support a real estate boom that ended in a massive bust.

One advantage of a public-run bank is that it could expand its role in extending loans under competitive terms during a crisis period, thus easing the respective central banks from doing the same.

“State-owned commercial banks would be a safe haven for retail and inter-bank deposits, act as a fire break in the process of contagion, and provide loans to businesses – particularly small and medium size enterprises – through the crisis,” the report said.