Privatization and increased foreign ownership transformed the Argentine banking sector during the 1990s. While both improved sector efficiency, there was concern that they might reduce access to credit outside of Buenos Aires. The results in this paper suggest that these fears were exaggerated. Provinces that privatized their banks suffered only temporary reductions in credit associated with cleaning the portfolio of the privatized banks. Typically, growth in lending by the privatized entity and by other banks restored credit to pre-privatization levels within a few years. In addition, increased foreign ownership coincided with more, not less, lending outside of Buenos Aires.

Although a large and growing literature shows that privatization can improve the performance of non-financial enterprises, there is less evidence on how it affects the performance of the banking sector. This paper summarizes the results from the papers in the special issue of the Journal of Banking and Finance on bank privatization. It concludes that although bank privatization usually improves bank efficiency, gains are greater when the government fully relinquishes control, when banks are privatized to strategic investors, when foreign banks are allowed to participate in the privatization process and when the government does not restrict competition.

We jointly analyze the static, selection, and dynamic effects of domestic, foreign, and state ownership on bank performance. We argue that it is important to include indicators of all the relevant governance effects in the same model. “Nonrobustness” checks (which purposely exclude some indicators) support this argument. Using data from Argentina in the 1990s, our strongest and most robust results concern state ownership. State-owned banks have poor long-term performance (static effect), those undergoing privatization had particularly poor performance beforehand (selection effect), and these banks dramatically improved following privatization (dynamic effect), although much of the measured improvement is likely due to placing nonperforming loans into residual entities, leaving “good” privatized banks.