What Does it Mean to Nationalize the Banks?

Architectural details on old bank building, Americus, Georgia, USA
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During times of financial crisis, you might hear talk of nationalizing banks. But what does that mean, and how would it affect the banks?

What is Nationalization?

Any time something is nationalized, it is taken over by the government. For example, banks in the United States are often businesses – not government agencies. They might be owned by shareholders, other types of investors, or even a family or small group of people.

In nationalization, ownership transfers to the government, usually as a unilateral decision. In other words, the private owners don’t decide to transfer ownership – the decision is made for them and they often have little choice but to accept the change.

When this happens, the previous owners generally lose. They no longer have an asset that (potentially) has value and can be sold or one that can generate income. Instead, the state now owns that asset. For that reason, nationalization is scary to those who own (or have an interest in) banks and other businesses.

Temporary Measures

Nationalizing the banks can be a temporary measure, and it is sometimes used as a form of rescue when banks are in trouble. In fact, this happens quite often in the United States: the FDIC steps in, takes control, and sells the bank to another bank – usually over a weekend.

When the FDIC takes over a bank, the bank has typically failed due to insolvency.

In those cases, we say that the bank went into “receivership” and was “reprivatized” when sold to another bank. For most consumers, that ends up working out well – instead of losing your money in the bank, you’re protected. In many cases, you’ll hardly notice when your bank fails.

Larger Scale Nationalization

Most people have no problem with the government stepping in for the occasional bank failure.

However, political debate starts to heat up when you start talking about:

  1. Widespread nationalization of all banks, or
  2. Nationalization of the nation’s largest banks

It’s unlikely that either of those scenarios will come to fruition, but anything is possible. The consensus seems to be that those measures would only be temporary – again, as part of a rescue during financial crisis. Running banks would be a significant operational undertaking for the U.S. government (even if only the largest banks were nationalized).

Scenario number one is most likely only if an extremely top-down regime with significant control were to rule the nation. Scenario number two was proposed during the mortgage crisis for banks considered “too big to fail.” Those banks were deemed to create excessive risk to the global economy and U.S. taxpayers.