Argumentative Essay Example 1 (Part 2)

One of the main reasons for nationalising banks is to take over control of the banks from their management that have lost credibility and is highly likely to go bankrupt. This was particularly glaring during the subprime mortgage crisis with many of the investment banks willingly putting themselves in high-risk positions and continuing doing so to salvage the bank. The management of these banks were also reluctant to take drastic actions to close down on high-risk departments as this meant huge immediate loss to the bank.

Another reason for nationalising banks is of course to help these banks to avoid immediate insolvency. Not only will this directly help the shareholders of the bank from losing all of their money, it also prevented a widespread panic of the public customers, who are effectively the creditors of the bank. This was seen in the case of Northern Rock, where customers crowd branches and withdrew nearly £2 billion from their deposits after news of Northern Rock struggle became public. This stopped only after the government stepped in and promised to assure the deposits.

Looking over to reasons against nationalisation, a nationalised bank will almost always have a socialism approach to doing business and put the interest of the country ahead of its shareholders. While this is beneficial for the country, the bank will suffer as a business entity. Moreover, nationalised banks are rarely as well managed in the long run as compared to a bank managed by the private sector. When Mexico nationalised 58 private banks during the 1982 economy crisis in the country, it severely strained the government capacity and all of the banks were so poorly managed that by 1990, only 18 of the banks remained (Banco de Mexico, 1992).

Likewise, nationalised banks usually foster a low spirit of competition resulting in low efficiency and therefore low profitability (Florence & Walker, 1950). A study by Sathye (2005) on the performance of nationalised banks compared to banks in private ownership further revealed that fully nationalised banks are severely lacking in several financial performance and efficiency indicators, while partially nationalised banks are performing much closer to fully privatised banks. In free market economies such as the U.S. and Britain especially, poor efficiency and financial performance will curb the growth of the economy at a time when growth of these large banks is essential in helping the economy recover.

Furthermore, nationalised banks typically have less attractive monetary remuneration especially during crisis period where there is consensus public disquiet at the award of bonus payments at the banks. As such, many capable managers may head off to the private sector, making the banks more prone to poor decisions that may further affect profitability (Elliott, 2009) and future survivability. This case is illustrated recently in the nationalisation of Britain’s RBS and Lloyds Banking Group where the banks have to abide by a remuneration policy in consistent with the government code of practice. The changes include a first of its kind, full deferral of bonuses and even so, most of the paid bonuses are in capital rather than cash.

By comparing both the advantages and disadvantages of nationalising the banking sector, it is clear that a balance has to strike out in between full nationalisation and full privatisation. It is vital that some of the banks in dire situation receive a boost from the government bailout fund to stay afloat. However, the government should take over management control only on matters that matter and as non-intrusive as possible. The government should also seek to privatise the banks as soon as conceivable so as to maintain the kind of efficiency and performance the banks enjoyed in private ownership. Also, while it is important to cut down on remuneration packages spending, it is important to award bonus payments as per normal to retain and recruit talented staff who were crucial to the bank’s recovery and might otherwise leave. Staff on low wages and have no responsible with causing the downfall of the banks should also be awarded bonus normally. All of these ensure that the bailout funds are used effectively and efficiently and that the government will not be strained in terms of capacity by having to manage so many banks on such a deep level.

This essay set out to discover whether nationalising either full or part of the banking sector is clearly advantageous after the fall of Lehman Brothers. However, the financial system is in such bad shape that none of the options is good or clearly advantageous. Rather, a least bad solution has to be selected. By not practicing prudent strategies when it comes to the subprime mortgage market, many of the U.S. and European banks have put the entire corporation to the sword. Many of these banks were in such dire situation that the government had to bail them out or face insolvency. Through researching historical cases of nationalisation and comparing the advantages and the disadvantages, a part nationalisation of the banking sector that seek to reprivatise it as soon as possible is the most feasible and therefore, least bad option.

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