I recently answered a question about what happens when a bank is taken over by the government. This got me thinking a little bit more about the pros and cons to having that happen. Would it be a good or bad or make any difference at this point?

To sum it up bank nationalization means a bank is owned and ran by the government. This has happened in our country’s history before and we came out ok. Case in point being the S&L debacle a few decades ago. The government took over and slowly sold off the banks’ assets and then eventually there was recovery. This also happened in Sweden and France, but France may be restarting the process. Below are my thoughts about the good and the bad regarding nationalization.

The good:

• More loans being made to consumers. More flexible guidelines would exist and more borrowers would qualify….
• Current deposits remain insured thru FDIC. Since FDIC can borrow money straight from the US Treasury, they would never run out of money.
• Equity holders would be wiped out..
• Possible guarantee of all deposits at US Banks…not just the one’s who are in trouble.This would raise levels confidence with consumers where they have their money, and shareholders as well..
• Foreclosure slow down…thereby banks won’t loose as much money and home values should normalize..

The bad:

• Customer service quality impacted. There would most likely be a decrease in quality service as banks become more conservative and lose employees…
• Closure of more branches
• Loans made to meet social objectives, quantity not quality. Banks may have a more political agenda…
• US Taxpayers taking on more expense/debt

Would nationalization solve the problem of bank failures? Or will this increase the crisis?

Will smaller banks be able to compete? Should the government discontinue anymore bailout programs and let the foreclosures run its course? It’s hard to say, anyway you look at it’s still going to be a challenging road….