there is evidence showing that the performance of government-owned banks depends on whether they purchased a distressed bank because of political factors. Unless they purchase a distressed bank, government-owned banks tend to perform as well as their private counterparts and especially so in countries with poor records on political rights and governance (Shen et al., 2014). This substitution between institutional elements and effectiveness of government-owned banks was also evident in Andrianova et al. (2012), who show the positive correlation between government bank ownership and argue that economic growth outcomes are stronger for the countries with weaker regulatory quality. One other aspect with possible developmental consequences is that the activities of government-owned banks may differ from private banks in many dimensions including the cyclicality of credit provision and asset and liability composition. Regarding the cyclicality of credit provision, Bertay et al. (2015) show that state-owned banks can smooth the credit cycles even after controlling for the election cycles and help during a banking crisis by providing countercyclical lending.<sup>5</sup> A country study by Gupta et al. (2015) provides an example of heterogeneity in asset composition by demonstrating that government banks in India invested a larger share of their assets in government securities, which may not be as growth enhancing as some alternatives such as corporate funding, even in the face of financial liberalization.<sup>6</sup> Widespread privatization programs, however, are often controversial and difficult to implement in many parts of the world, especially in developing economies where the share of SOCBs remains comparatively high. This is a general trend that goes beyond the financial industry and affects all sectors of the economy that remain in state hands. It largely reflects political opposition stemming from doubtful success in previous episodes of privatization, especially when corruption played a role; negative (actual or perceived) distributional consequences; and political economy considerations (see Estrin and Pelletier, 2019, for a discussion). Skepticism of privatization may have been exacerbated by the GFC, which in many respects has called into question the liberal approach championed in the previous two decades and in the case of the financial sector has tarnished the reputation of private bankers in the eyes of voters, reducing governmental and investor appetite for privatization. This may change in the post-pandemic world, when governments around the world will have to find ways to manage the vast amounts of debt accumulated as a result of the fiscal policy responses to the Covid-19 crisis. In this context, privatization programs, including of banks, may receive renewed interest in the next few years.

Given the numerous trade-offs and dependencies surrounding government ownership of banks, it is crucial to optimize the privatization decisions and processes for the policy makers. The evidence from existing empirical studies on bank privatization, although not conclusive, shows that standard metrics used to proxy bank performance typically improve post-privatization.<sup>7</sup> This is true especially when the government fully relinquishes control, banks are sold to strategic investors, and bidding is open to all investors, including foreign investors. These findings are consistent with the well-established literature showing the problems associated with government ownership of banks, which introduces several direct and indirect economic distortions (see, for example, Kumar,

> 5 Choi et al. (2016) document the countercyclical role played by government-owned banks during the GFC. Moreover, Bosshardt and Cerrutti (2020) recently confirm earlier findings and show that during the GFC state-owned banks lent relatively more compared to domestic private counterparts with an objective to stabilize the economy in their sample of 25 emerging markets.

> 6 See Boubakri and Saffar (2019) on how state ownership affects the debt choices of privatized firms.

> 7See, for example, Beck et al. (2005a), Beck et al. (2005b), Clarke et al. (2009), and Cull and Spreng (2011) for singlecountry analysis; or Azam et al. (2004), Boubakri et al. (2005) for cross-country setting.

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