State-owned Banks and Profitability in Central and Eastern Europe: Testing the State-owned Banks Advantage Hypothesis
State-owned Banks and Profitability in Central and Eastern Europe: Testing the State-owned Banks Advantage Hypothesis

Summary/Abstract: This paper presents and tests an original state-owned banks advantage hypothesis, according to which the nationalisation of a part of the banking sector may positively influence the financial results and reduce risks associated with banking activity. The hypothesis was tested using a model comparing three groups of banks: state-owned banks, foreign owned banks, and domestic privately owned banks. The estimation of model parameters was carried out using a fixed-effects panel data analysis for banks based in Central and Eastern European countries over the period 2014–2020. Based on the models for ROA and, separately, ROE, a statistically significant negative relation was observed in the returns generated by state-owned banks compared to private domestic and foreign banks. The results also indicate a higher business risk for state-owned banks, measured by the level of non-performing loans, which is likely to be related to involvement in projects that are not always profitable but often involve higher credit risk. Therefore, we argue that elements of a country’s economic or social policies matter when conducting business but negatively affect the performance of state-owned banks. The results of the model also demonstrate that a bank’s market size negatively affects its performance.

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