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Government vs. Private Control, Political Loans, and the Privatization of Korean Banks

This paper compares the performance of banks with and without effective government control in appointment of chief operating officers in Korea using panel data. A privatization program succeeded in spreading ownership of banks widely among the public. Government retention of an ownership stake in an institution meant de facto control by government, decision-making subject to political objectives, and lack of government respect for investors' property rights following privatization. A model is presented in which political loans are a constraint on banks subject to government control. It is found that banks controlled by government, despite charging lower loan rates, experienced disproportionately bad loan performance, and were inefficient compared to privately controlled banks.