A Resurgence of Bank Nationalisations

An offshoot of the global financial crisis has been the significant changes in economic policies in the developed world. The recent phenomenon relates to increasing calls from leading economists to nationalise troubled banks, particularly in the U.S. The concept of nationalisation was previously associated with the so-called ‘socialist’ economies, but is now becoming closer to reality even with proponents of the free market.

As Paul Krugman notes in his column in the New York Times, “Comrade Greenspan wants us to seize the economy’s commanding heights. O.K., not exactly. What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.”

Further, Matthew Richardson and Nouriel Roubini, professors at New York University’s Stern School of Business note: “As free-market economists teaching at a business school in the heart of the world’s financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.” Such comments arise in the context of concerns regarding the continued viability of leading U.S. banks such as Citibank and Bank of America.

Apart from the policy rhetoric, nationalisations tend to invoke certain fundamental questions. Often, there is a conflict of interest between shareholders of banks (who tend to take a ‘haircut’, as they say, in a nationalisation by having to give up their shares at low values) and that of other stakeholders (such as tax payers and the public who suffer if Governments have to continually backstop troubled banks without being taken over). There is also the question of whether governments are in a better position to run businesses such as banks as opposed to the private sector. These issues are not novel in the Indian context with a substantial part of the Indian banking industry being populated by nationalised banks. Many of these issues have been the subject matter of intense debates in 1969 and 1980 when several Indian banks were nationalised. Some of these were even litigated all the way in the Supreme Court of India (R.C. Cooper v. Union of India, AIR 1970 SC 564). What is interesting in the current scenario is that the revival of this debate in the U.S. and other countries has thrown the spotlight on the Indian experience with reference to bank nationalisations – while the analysis in the Knowledge@Wharton suggests caution regarding adopting the Indian model of nationalisation, an interesting fact reported yesterday is that Citibank’s market capitalisation has become less than that of the State Bank of India (which is not only India’s largest bank but is also in the public sector). The key difference, however, is that the recent moves recommend nationalisation as a temporary measure, while in India it has become a permanent feature (although several nationalised banks do have public shareholders and their shares are listed and traded on stock exchanges).

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  • This was interesting, Although the constitutional mandate for compensation is very generous in the US. As per the Vth Amendment (and the 14th) the right to property cannot be taken away without due process. In the US that means market compensation.
    In India when the bank Nationalisation was being argued, we had a truncated property right which was further truncated by the subsequent amendments. Now we don’t have a property right at all (notwithstanding Article 300A) The Indian government has much more flexibility than the US government to do a nationalization (See Article 19(6)(2) of the Indian Constitution)

  • Bank Nationalization in India was seen as an end in itself. The nationalized banks were not banks on the edge of bankruptcy (about to take the rest of the economy with them), but any bank with a large enough base to help garner votes. Plus bank nationalization was a long standing goal of the Congress party since days of the Independence struggle.