Banks in Crisis: When Governments Take Temporary Ownership

Editor's Note: This is the ninth in a series of policy briefs on the crisis—assessing the policy responses, shedding light on financial reforms currently under debate, and providing insights for emerging-market policy makers.

About the author: David Scott is program manager in the Financial and Private Sector Development Vice Presidency of the World Bank Group.

The current financial crisis evolved quickly. In most of the developed countries affected, governments initially improvised solutions that eventually led to substantial investments in systemically important banks. Not all their actions are worth emulating, especially those undermining the ability of all shareholders to hold the banks’ board and management accountable. Lessons from earlier crises show that governments acting as temporary owners can minimize costs to taxpayers by sticking to sound commercial practices, good corporate governance principles, and competitive neutrality. Quickly developing and making public the exit strategy is also important.

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