Banking Banking Basics What Does It Mean to Nationalize Banks and Industries? By Justin Pritchard Updated on March 4, 2021 Reviewed by Michael J Boyle Reviewed by Michael J Boyle Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics. learn about our financial review board In This Article View All In This Article What Is Nationalization? Temporary Measures Larger-Scale Nationalization Effects of Nationalization Photo: bokan76 / Getty Images During times of financial crisis, the U.S. government sometimes provides relief designed to stimulate the economy and prevent economic disasters. One result is that the government can end up playing a significant role in the fate of many banks. When the government does intercede, the topic of nationalizing banks often arises soon afterward, and the subject stirs lively debates. What does it mean to nationalize banks, and how would nationalization affect banks? What Is Nationalization? Nationalization occurs when a government takes over a private organization. Government bodies end up with ownership and control of the business, and the previous owners (or shareholders) lose their investment. Banks in the United States are typically businesses, not government agencies. The bank's owners might be stockholders, a family, a small group of people, or other investors. Nationalizing would give control of these banks to the government. Unilateral Action In nationalization, ownership and control transfer to the government, usually as a unilateral decision, meaning the government makes the decision, not the bank owners. A government might make a unilateral decision if, for example, a bank is at or near the point of failure, the consequences of which could have rippling effects on the rest of the economy. Stakeholder Losses After nationalization, the previous owners no longer control the asset. If the asset has value, nationalization can understandably be a scary thought for private investors. Note When nationalization occurs, the previous owners and managers lose their ownership interest. However, individuals in management positions might end up keeping their jobs. Temporary Measures Nationalizing banks can be a temporary measure, and it happens when banks in financial trouble need rescuing. Temporary bank nationalizations are not unheard of in the United States: The Federal Deposit Insurance Corporation (FDIC) steps in, takes control, and transfers ownership of the failed bank to another, healthy bank. When banks are insolvent, they go into receivership and get re-privatized when another bank purchases the failed bank’s assets. The period of government ownership is typically brief, and the bank's assets become privately owned again shortly afterward. For most consumers, that system works quite well. Instead of losing your money in a bank failure, you’re protected by the federal government. In most cases, you’ll hardly notice when your bank fails, because the FDIC is protecting your assets. Note In some cases, the U.S. government controls banks for a more extended period. In complicated situations, such as with IndyMac Bank during the financial crisis of 2008 and 2009, the process can take several months or years. Federally insured credit unions, which are owned by their members, or customers, have similar protection under NCUSIF insurance. Larger-Scale Nationalization Most people have no problem with the government stepping in to clean up the occasional bank failure. Political debate starts to heat up when the topic turns toward more drastic measures, such as the nationalization of all banks, or nationalizing other industries, such as healthcare. It’s unlikely that all banks will be nationalized in the U.S. Such actions are viewed as temporary, part of a rescue during events such as a financial crisis. Running banks would be a significant operational undertaking for the U.S. government, even if only the largest banks were nationalized. Nationalizing all banks is likely only if an extremely top-down regime were to govern the nation. Nationalizing only the largest banks is a scenario that was proposed during the sub-prime mortgage crisis for banks categorized as “too big to fail.” Those banks were deemed to create an excessive risk to the global economy and U.S. taxpayers. However, the use of other measures, such as higher capital requirements, instead helped to reduce the likelihood of catastrophic failures. Ideology Nationalizing an industry is controversial, particularly in the U.S. Developing nations have taken over industries during times of upheaval, but the U.S. tends to be a more hands-off environment. However, nationalization is possible whenever political forces make it acceptable. For example, during the mortgage crisis, the actions of big banks (and their repercussions) drew the attention of lawmakers, who found it sensible to take control of certain institutions. Healthcare is another example where abuse and a lack of transparency have caused suffering, making nationalization seem like a potential solution to some. Effects of Nationalization Nationalization could have several outcomes, each of which could affect stakeholders in different ways. Executives When banks are nationalized, stakeholders (including executives, who have significant interests in the bank) lose money. Executives who currently have oversized compensation packages could earn less if they stick around after the transfer. However, that could potentially discourage moral hazard, or the situation that arises when executives take risky actions that only have consequences for taxpayers. Shareholders Investors who profit from companies that take risks can also lose. Ideally, that possibility discourages investors from putting money into risk-takers and makes it harder for those companies to raise capital. Government Management Some argue that the federal government is ill-equipped to manage complex organizations and that politics can affect operations and management. Others say that taxpayers can ultimately save money by rescuing troubled banks and bringing them back to life (without letting all of the benefits go to shareholders and executives). Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The Brookings Institution. "Bank Nationalization: What Is It? Should We Do It?" Page 11. Federal Deposit Insurance Corporation. "When a Bank Fails - Facts for Depositors, Creditors, and Borrowers." FDIC. "Failed Bank Information." Federal Reserve Board. "Financial Regulation Since the Crisis." Columbia Law Review. "The Privatization-Nationalization Cycle." Page 3. The Brookings Institution. "Bank Nationalization: What Is It? Should We Do It?" Page 12.