Devin Case-Ruchala - Why Do They Form?

How and Why Public Banks Get Created

Public banks—financial institutions owned and controlled by governments—play a central role in funding development, responding to economic crises, and advancing major investments in national priorities from infrastructure to clean energy. While their functions are widely studied, much less is understood about the conditions that lead governments to create them in the first place.

Earlier explanations often assumed public banks were most likely to appear in more autocratic regimes, where leaders faced fewer constraints, or in less industrialized economies, where governments needed to channel credit into strategic sectors. Other studies have suggested that certain types of public banks, such as sovereign wealth funds, are spread through international policy diffusion, as ideas move across borders. While these factors help explain parts of the story, they don’t account for why most governments, most of the time, do not create public banks—or why countries with similar political and economic conditions can end up with very different patterns of public bank creation.

In my dissertation chapter, “Hurry Up or Wait: Public Bank Formation in the 20th Century,” I developed a general theory showing that creating public banks is not a routine policy choice resulting from regime type or development level. Instead, public banks usually emerge when major disruptions shake the foundations of the political and economic status quo.

Theory: The Role of Political Disruption

The theory identifies state formation—particularly when countries gained independence from colonial powers—as one such source of major political and economic disruption that explains a majority of public bank formation, most of which occurred in the 20th century across the Global South. Prior to decolonization, private colonial banks predominated, and there was limited opportunity for economic policy-setting by local populations. Decolonization as a disruption to this status quo created an opening for institutional and policy change. However, whether this led new states to create public banks depended on two key factors coinciding with state formation:

Disruption to private financial power, like a banking crisis or the collapse of foreign-owned banks, which weakened opposition to public banks
A surge in economic nationalism or left-wing party power, which built momentum for stronger government involvement in finance

When all three conditions converge, countries tend to follow a ‘serial formation’ pathway, creating public banks repeatedly in the ensuing decades following state formation. Once this process began, it often fed on itself: early public banks helped meet economic needs, shifted power away from private finance, and built up expertise that lowered barriers to creating more.

When these conditions were absent, countries typically do not create public banks until later crises—such as financial collapses, wars, or sanctions—create urgent needs and open a temporary window for action. These conditions are part of the ‘irregular formation’ pathway, where public banks emerge more as exceptional responses to emergencies. In these situations, policy advocates and political entrepreneurs often play an essential role in putting public banks as a specific and unique policy idea on the agenda.

Importantly, these pathways are not deterministic. Major disruptions later on—like regime change or severe economic shocks—can reshuffle the deck and push countries from one trajectory to another.

Testing the Theory: Case Studies & Data

This research draws on a global dataset I published in the Review of International Political Economy, which tracks public bank formation from their origins in the 15th century through present day (more detail on the dataset is available here). The dataset helps show patterns of public bank formation writ large, supporting case selection and statistical analysis for this study.

The evidence supporting the theory comes from two main sources:

Case Studies: Historical comparisons—for example, India’s serial formation of public banks after independence from British rule and South Africa’s more episodic, crisis-driven pattern—illustrate how similar colonial systems produced different outcomes depending on the circumstances surrounding decolonization.
Statistical Analysis: Large-scale analysis confirms that state formation, financial crises, and ideological shifts explain much more of the variation in public bank creation than factors like regime type or development level.

Implications for Other Regions and Times

Although the study focuses on countries that decolonized in the 20th century, the theory also sheds light on other times and regions:

In Eastern Europe after the fall of the Soviet Union, newly formed countries’ banking systems were already almost entirely state-owned. So in this context, state formation did not lead to the creation of new public banks; rather the disruption that was the collapse of the Soviet Union, combined with economic distress and Western intervention (via the International Monetary Fund), led to widespread bank privatization.
Earlier decolonization in Latin America (19th century) and North America (18th century) happened when private banking was less formalized, so early public and private banks often emerged together through experimentation, setting them on a de facto ‘irregular formation’ pathway. WWII presented a subsequent global shock for Latin American countries especially that led many to pursue state-led development beginning in the 1940s, which included the creation of new public banks through legislation or nationalization, converting them from irregular to serial formation. So for these countries, WWII rather than state formation presented the shock to status quo.
In the 21st century in the Global North, recurring financial crises and backlash against globalization have opened policy windows for public banks, even in market-oriented economies such as the US and UK. Unlike earlier periods, these more recent public banks often aim to support private markets (‘public-private investment’) more than promote state-led development. Recent examples include the British Business Bank, Canada’s Business Development Bank, and seeding of a national green bank in the US through the 2022 Greenhouse Gas Reduction Fund.

The connective thread between these geographies and time periods, as described in the theory of the paper, is the role of a significant disruption that changes the status quo equilibrium. The conditions surrounding that disruption inform whether public banks are created continuously, as one-off events, or in some cases results in privatization of public banks. Instances of public bank creation outside of these contexts remain marginal.

Why This Matters

Understanding how and why public banks get created sheds light on development, crisis response, and economic change. Whether funding industrialization, stabilizing financial systems, or supporting climate action, public banks remain a powerful policy tool shaped by moments of upheaval. This broader history also gives context to when, how, and why public banks are–or arguably more so are not–observed throughout history up to the present day.