What Is a Nationalized Bank?
Nationalization refers to the process where a government takes over a monopoly or other sector to operate them so as to benefit the public. This process aims to take away any special financial or other advantage enjoyed by a specific group at the cost of the taxpayers and the public at large. Nationalization aims to reduce economic costs.
In the case of a nationalization of a bank, public takeover means the government or Treasury functions as the bank's source of credit. Funds would be channeled for productive enterprises. Businesses and households can expect an easing of the heavy debt burden they face as a result of the lending practices of private banks.
The top management personnel of a bank that is taken over is replaced by government appointees who are committed to implementing policies and practices aimed at restoring solvency and public confidence in such institutions.
A noted feature of nationalized banks, particularly in developing countries, has been the tendency to lend to specific sectors. Credit has been targeted to economically or socially deprived sectors leading to more inclusive banking.
Historically, governments in various countries have nationalized banks when such institutions faced bankruptcy or operated fraudulently. The rationale for nationalization includes protecting depositors, replacing inefficient or corrupt top management, and ensuring the institutions return to stable and profitable operations. Notably, such banks have been re-privatized once they reach this stage.