Privatization and Bank Liquidity Creation

Allen N. Berger, Narjess Boubakri, Ruiyuan Chen, Omrane Guedhami, and Xinming Li

♦ Building on existing views of state ownership, we examine the impact of banks’ privatization on their liquidity creation, a comprehensive measure of net bank output from all portfolio items shown to have favorable economic outcomes. We apply a difference-in-differences approach to over 4,000 banks from 56 countries over 14 years. We find significant increases in liquidity creation post-privatization, consistent with expected changes in incentives, with the impact shaped by the institutional environment. However, privatization reduces liquidity creation during the global financial crisis and other banking crises. Results remain robust to a battery of robustness tests.