Deregulation and Privatization of Commercial Banking

Abstract

Privatization is tied to deregulation. This paper studies the effects of deregulation and privatization on commercial banks in Mexico. Our sample allows us to examine the stock market's response to different deregulation and privatization policy actions. The mere announcement of privatization of the banking system produced a mean abnormal return of 15.6% for all commercial banks. Pre-privatization bank shareholders earned a mean market adjusted return of over 65% as a consequence of privatization. We undertake an econometric analysis of the determinants of the private benefits of control, and construct an estimate of the true value of control for the bidders based on the degree of competition in the auction. Based on this measure, we estimate that a mean of almost 20% of book value was not extracted from privatization bidders due to lack of more competition in the auction. Furthermore, this study assesses the effects of deregulation and privatization on industry performance. As a result of freer operation rules, deregulation brought about an increase in activity levels and doubled operating margins. We also find evidence for efficiency gains in privatization emerging from reduced agency costs. Nevertheless, the increased profitability of the industry can only be explained in conjunction with its incomplete deregulation, which retained protective regulation of operations and virtually prevented foreign competition. An estimation of a dominant-fringe firm model and an analysis of post-privatization performance provide support for this claim.