Bank Ownership, Lending, and Local Economic Performance During the 2008-2010 Financial Crisis

Abstract

While the finance literature often equates government banks with political capture and capital misallocation, these banks can help mitigate financial shocks. This paper examines the role of Brazil's government banks in preventing a recession during the 2008-2010 financial crisis. Government banks in Brazil provided more credit, which offset declines in lending by private banks. Areas in Brazil with a high share of government banks experienced increases in lending, production, and employment during the crisis compared to areas with a low share of these banks. We find no evidence that lending was politically targeted or that it caused productivity to decline in the short-run.

Do Public Sector Banks Promote Regional Growth? Evidence From an Emerging Economy

“…The positive impact is in line with other recent studies in this area. Coleman and Feler () examined whether during times of financial crisis and instability government ownership of banks matters, and whether these banks lend more and contribute to increased employment and incomes. They investigated this in the context of 2601 localities in Brazil and considered four federally‐owned banks and 115 private banks with over 18,000 bank branches.…”

“…; Cole ; Andrianova ; Bertay et al . ; Panizza ; Coleman & Feler ). Credit by the state banks is less procyclical and less responsive to macroeconomic shocks than the credit through private banks.…”

“…Credit by the state banks is less procyclical and less responsive to macroeconomic shocks than the credit through private banks. For example, during the 2008 crisis, government banks continued to provide funds to the real economy, in contrast to private and foreign banks (Coleman & Feler ). The availability of funds and government guarantees may also make public banks less risk averse, which could lead to an increase in credit (Ivashina & Scharfstein ).…”

“…The sub‐national units may differ significantly from the national level economically, socially, geographically, and even politically, requiring a different set of policy responses tailored to their own specific needs (Kendall ). Focusing on public banks at lower levels is also significant as alleviating local financial constraints could spur local economic growth (Coleman & Feler ). Sub‐national enquiry is especially important as the states play an important role in poverty reduction and the achievement of sustainable development goals.…”

State-run Banks, Money Growth, and the Real Economy

“…State-run commercial banks are important in many countries (La Porta et al 2002), so pseudo-monetary policy might work elsewhere. Prior work shows state-run bank lending to be driven by political pressure, not profit maximization, in many economies (La Porta et al 2002, 2003Sapienza 2004;Berger et al 2005;Dinc 2005;Carvalho 2014;Coleman and Feler 2015).…”