State bank

Election campaigns are like New Year’s resolutions – many things are promised, a fraction of them are implemented. One is almost shocked when some evidently populist program points are still discussed, or even about to be implemented after election. Unfortunately, this is exactly the issue in the Czech Republic, where the winner of 2013 election (Czech Social Democratic Party) plans to set up “a strong retail bank owned and controlled by the state”.

The reasons for this naive market intervention are “to strengthen the role of the state in banking sector, which will lead to (1) higher level of competition, (2) better services for lower prices and (3) to easier approach to credits and loans for Czech residents and firms”, as Bohuslav Sobotka, the Party leader and Prime Minister candidate, explained in the interview for the Czech daily Právo.

It is totally wrong to think that the concept of a state owned bank operating efficiently in a market environment could work.

Firstly, the price of money cannot be at the same level on all markets, for all agents, at every moment. The risk that a borrower – whether a corporation or an individual – will not repay a loan varies, of course, depending on many perspectives: vertically (according to size and income of the applicant), horizontally (according to industry branch of the firm), but also regionally (i.e. between residents of different states, or different regions). All these aspects play an important role on financial markets. Banks do not evaluate risk associated with potential borrowers to pass the long time, on the contrary – this process must ensure that clients’ deposits are managed responsibly, and, of course, it must meet regulatory requirements, and moreover, a bank must remain attractive its shareholders and other clients.

Secondly, it is nonsense to assume that everyone has a claim to get money which they ask for. Most explanations are mentioned above, but it is also necessary to add that a contract about a loan, like every market transaction, must be Pareto efficient, i.e. it has to be beneficial to both sides – demand and supply. Voluntariness is an essential condition for that. Just as one cannot come to your shop and enforce a deal for HIS price and HIS conditions, one cannot come to a bank and claim some money to borrow. Different people have different purchasing power, which means they can offer different volume of goods. It is normal and it is motivating.

Thirdly, it is a big mistake to believe that real growth of wealth could be generated by expanding money supply. Sobotka, as well as other politicians with no or weak background of economics, commutes the growth with aggregate demand shocks. As mentioned in macroeconomic lectures during the first semester of university studies, more money in economy with no improvements in product potential (long term aggregate supply) will not generate better wealth; it will just mean that the same production will be evaluated with higher volume of money, which will eventually lead to an increase in aggregate price level, not in real production.

Fourthly, it has become a norm that politicians forget the origin of tax returns and public funds with which they like to fulfill their own personal visions. The money is not virtual money. It is not even the money earned by the state! Residents are forced to give the money up by tax legislation and involuntarily, through these tax levies, pay for operations of the state apparatus. Extraneous people (politicians, bureaucrats) decide about extraneous money (taxes) which is, as Milton Friedman concluded from his decision-making matrix, the most inefficient situation we can imagine. Frankly, I do not think the state bank, politically motivated “to lend everything to everybody, because more money means more wealth” could be used as an example of pure efficiency. In the ‘90s, Czech taxpayers bailed out hundreds of billions CZK of the so-called bad loans, created before 1989, and by political decision, brought out from private banks to state managed Czech Consolidation Agency. Thank you, our dear government, but we do not want to live through the same “adventure” again!

So, do we really need state owned businesses to improve market services?

No, of course we don’t! The problem of the Czech banking sector is elsewhere. Clients are so rationally ignorant (or as famous economist B. Caplan says: stupid) that banks have a very easy job of earning a really nice sum of money every year. A few facts: Two-thirds of total assets of the Czech banking sector are deposited in four largest banks, which – due to long-term consumer price comparisons – offer very low effective interest rates on deposits (barely covering inflation rate), relatively high interest rates on loans, and, last but not least, much higher banking fees. However, there are about thirty retail banks in the Czech Republic (all of them covered by state deposit insurance, of course)! Do you doubt that Czech banks do not risk, but just cover the business with discount transactions with Central banks on behalf of clients (interest revenues) and with fees and commissions? I do not. So, what to do?

All we need is more clients willing to change their expensive bank with bad quality of services for a better one. Not regulation, not more state care paid from higher taxes. Mobility of banking clients is the one and only thing that could set the market in motion and crack the competition. Consumers (demand) and traditional market principles hold the key to a change.

The sooner we (both clients and politicians) understand it, the better for us.

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