The impact of political factors on bank privatization in European countries

Abstract

Numerous empirical studies argue that political factors might be the critical determinant of a government’s decision to privatize state-owned banks. The aim of this study is to go through the literature on the state ownership and the rationale for bank privatization and to test this argument in 25 European countries during the period 1996-2016. By using the logistic regression model to test the connection between the privatization probability and different political factors including political risk, public pressure, ideological preferences of government and political competition, the empirical results of this paper indicate that in European countries, the characteristics of a government’s political system is significantly related to the likelihood of privatization. Specifically, bank privatization is more likely in more stable governments and where there are more public pressure and political competition. However, government ideology in terms of economic orientation has no significant impact on the government’s decision to privatize. Overall, the findings are in line with the argument. These results contribute to the growing empirical work that underscores the importance of political influence in European banking systems.