Public Banks, Public Orientation and the Great Financial Crisis of 2007–2008
Are publicly oriented financial institutions stabilizing forces in the modern financial world, and if so, at what cost? In recent decades, we show that publicly oriented banks contribute to financial stability by lending less pro-cyclically and even, in some cases, counter-cyclically, than did their private banking counterparts. Further, while earlier studies of public banking tended to show that they were inferior to private banks in terms of resource allocation, more recent literature finds that this is not generally the case. We are left in the end with a more interesting question: Given both the cyclical and secular net benefits of publicly oriented banking, should we encourage more publicly oriented financial institutions in our economies? Our answer: probably, but it’s complicated.
KeywordsPublic banks Financial crisis Financial stability Social orientation Pro-cyclical Counter-cyclical
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