Bank Nationalization: A Survival Manual

Douglas J. Elliott
Douglas J. Elliott Former Brookings Expert, Partner - Oliver Wyman

April 21, 2009


Prominent voices call for the nationalization of the weakest major U.S. banks, although advocates of that step are still in a distinct minority. In my view, nationalization should only be a last resort measure, as has historically been the case. (The government has frequently taken over smaller banks, but on only rare occasions has it taken over one of the largest banks in the country.) However, such a nationalization could happen in the current crisis, either because we reach the stage of last resorts or because the anger and desperation of the public creates a political consensus for this drastic action.

Nationalization of a major banking group would be extremely complicated, so we need to be prepared in case it occurs. This paper presents a “survival manual,” with suggestions for minimizing the damage from nationalization. Examining the practical issues should also make clear why nationalization is a choice to be avoided, if possible.

There are many definitions of “nationalization.” Here it will refer to a federal takeover of a bank where the government takes full, or nearly full, ownership and chooses to actively play the role of controlling shareholder.

This paper is designed around 15 essential steps to minimize the damage to taxpayers and the country in the event of a nationalization. These are:

Step: 1 Decide the criteria for nationalization, including the legal authority to use
Step: 2 Determine which large banks meet these criteria
Step: 3 Choose when to act
Step: 4 Calculate the size of the hole to be filled and ensure funds are available
Step: 5 Decide how to allocate the losses between taxpayers, shareholders, and creditors
Step: 6 Design a preliminary exit strategy
Step: 7 Create an ownership structure for the government’s stakes
Step: 8 Line up a few key managers
Step: 9a Announce the nationalization(s)
Step: 9b Shore up confidence in the rest of the banks
Step: 10 Create a sound financial base; institute a good bank/bad bank structure
Step: 11 Make the necessary managerial changes
Step: 12 Announce a new strategic plan
Step: 13 Implement the new plan
Step: 14 Sell the government’s stake over time

Read the full paper »