Bank interest margin management under partial privatization: an option-based valuation

Most bank privatization programs begin with a period of partial privatization in which the government remains the controlling owner. This paper examines the relationships among the degree of partial privatization, political interference, capital regulation, and the optimal bank interest margin. The bank's interest margin is positively related to the degree of partial privatization when the bank stays in a relatively less risky state of the world and its capital stock increases through share issue privatization, positively to political interference when the bank stays in a relatively more risky state, and negatively to capital regulation when the bank stays in a relatively less risky state. The default risk in the bank's equity return is negatively related to the degree of partial privatization when its capital stock increases through share issue privatization, positively to political interference and positively to capital regulation. Our findings provide alternatives for the evidence concerning the market value and variance in the bank's profits under partial privatization.