Force majeure: natural disasters, civil strife and other uncontrollable risk factors. SOEs in the financial sector face very different risks than SOEs in the nonfinancial sector. Financial SOEs, by their nature, engage in risky activities, and the challenge lies in managing these risks well so as to achieve an acceptable level of productivity. For example, the banking system’s core business model is to take on credit and liquidity risks by engaging in maturity mismatches. Thus banks are mainly financed through short-term deposits and use these funds to finance long-term projects, earning income on the spread between these two maturities. Historically, in many countries state-owned financial companies, banks in particular, have been an important source of fiscal risk due to their large recapitalization needs once they become overburdened by nonperforming loans. For example, the fiscal cost of restructuring a banking system severely affected by the 1998 Asian crisis amounted to over 50 percent of GDP (Shapiro and Globerman 2007).
