Abstract
Since the late 1990s, conventional wisdom has been challenged by the increasing instability of the financial markets. In this context, the Global Financial Crisis (GFC), which began in August 2007, and the “Great Recession ” (GR) that followed, led the governments of advanced and emerging countries to adopt countercyclical fiscal and monetary policies, mainly monetary policies, in an attempt to rescue financial and non-financial corporations . Brazil was not an exception. This chapter analyzes the Brazilian credit market during the GR. More specifically, we propose to test the hypothesis that State-owned Banks (SOB) are able to play a positive role in stabilizing aggregate credit, particularly during financial crises. Using two different econometric approaches, Markov-Switching Vector Autoregressive Models (MS-VAR) and Vector Error Correction (VEC) models, we will provide relevant evidence that would suggest that the credit originated in SOB shows countercyclical characteristics, while private banks behave in a typical pro-cyclical manner.
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Notes
- 1.
For the purposes of this article, we will deal with SOB in general, without the worry of specifying whether they are institutions specializing in long-term credit supply, such as development banks. Thus, SOB are public financial institutions whose controlling interest belongs to the State (central government or local governments). For more conceptual details see, among others, Jayme Jr. and Crocco (2010), World Bank (2012), and Unctad (2016).
- 2.
In addition, of course, of multilateral and regional banks , controlled by several countries. Examples in this regard are: The World Bank, regional development banks in Asia, Latin America, Africa etc.
- 3.
The same study states that: “The Brazilian government actively used its state infrastructure bank to engineer the rapid countercyclical response to mitigate the contagion effects from the global financial crisis” (World Bank 2012, p. 106).
- 4.
Keynesian macroeconomic policy coordination would focus mainly on (i) designing fiscal policies with the aim of expanding effective demand; (ii) making monetary policy more flexible aiming at stimulating consumption and investment; and (iii) coordinating and regulating financial and foreign-exchange markets in order to stabilize capital flows and exchange rates. In short, taking up also how Minsky (1986) stated this problem, a modern capitalist monetary economy needs a Big Government and a Big Bank that intervene and regulate through their economic policies and assure that they evolve smoothly over time.
- 5.
In the General Theory, Keynes (1936, 1962) proposed some economic policies , such as fiscal, monetary, and income policies, in order to address the fact that “[t]he outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes” (p. 372). See also Arestis and Sawyer (2007).
- 6.
These are split into four visions (i) the social view suggests that SOB should be used to offset market failures, as long as the benefits of its existence outweigh the costs arising from those imperfections; (ii) the “development vision” suggests that the low degree of sophistication and depth of financial markets, which characterize the very condition of “delay,” would force the state to act in the credit supply to compensate for the lack of funds from private sector; thus the State would take the economic development promoter function; (iii) in direct opposition to such a perspective there is the “political vision” to which SOB are channeling sources of income by those in power to their political allies; with this, the state credit would not only distort markets as would be systemic inefficiency and corruption; and (iv) the “vision of the agency” shares the social/developmental perspective that the state can complete markets and resolve flaws, but simultaneously points to the risks arising from state action. For more details see the following studies: Jayme Jr. and Crocco (2010), Gutiérrez et al. (2011), World Bank (2012), Luna-Martinez and Vicente (2012), and Ollioqui (2011).
- 7.
Focusing on development banks, Unctad (2016) suggests that: “…development banks are needed to bridge finance from end-savers to development projects. Such bridging should be done by development banks at all levels—national, regional and international—in order to provide the financing needed in the developing world. Development banks can thus be key players for development by providing long-term financing directly from their own funding sources, by tapping into new sources and by leveraging additional resources, including private, through the co-financing of projects with other partners” (p. 6).
- 8.
“The economic literature points to another source of market failure that justifies direct state intervention in the credit market in a countercyclical fashion (…) private banks have limited incentives to lend during periods of economic downturns and low interest rates and do not internalize the fact that, by increasing lending, they would push the economy out of recession. Such coordination failure provides justification for DBs—to ensure continued provision of needed credit to the economy in the face of private sector cutbacks. In these circumstances, state intervention could solve a coordination problem and make monetary policy more effective…” (Gutiérrez et al. 2011, p. 8).
- 9.
At the end of June 2016, there were 28 SOBs in Brazil.
- 10.
The Word Bank (2015) states that “Brazil’s development bank BNDES has historically played a major role in providing long-term finance through directed lending … (it) has provided extensive financing for large-scale investments in physical and social infrastructure whose social returns may not be fully internalized by private investors” (p. 36). There is more relevant evidence, and discussion, in Rezende (2015) and Unctad (2016).
- 11.
“While private sector banks in Brazil and elsewhere contracted lending and loan maturities in the aftermath of the financial crisis, Brazil used its government banks, including BNDES, to play a countercyclical role. The share of credit extended by Brazil’s government banks rose from 13 to 18% of gross domestic product between September 2008 and 2009. Thanks to a generous capital injection by the government (R$100 billion in 2009), BNDES was able to extend special credit facilities with maturities of more than one year at substantially discounted interest rates and increased lending, from R$160 billion (at 2005prices) in Q4 2008 to R$277 billion in Q4 2009.The reference interest rate for long-term loans was set at 6%, which was 7.5 percentage points below the market rate” (World Bank 2015, p. 36).
- 12.
Exceptions in this regard are Oliveira (2010, 2014) and Bonomo et al. (2014). These studies apply different econometric techniques to assess the impact of SOB’s credit in non-financial firms’ investment decisions. The countercyclical role and the comparison between the private banks’ and SOB’s credit do not represent their main research goal. On the other hand, Coleman and Feler (2015) found econometric evidence that SOB acted countercyclically. They suggested that SOB’s credit created inefficiencies in the economy. More recently, Krznar and Matheson (2017) analyze the nexus between the financial cycle and business cycle in Brazil. In doing so, they found that dynamics “… of public and private cycles are somewhat different, reflecting the countercyclical use of public banks over 2008–2013” (p. 8).
- 13.
The selection of the time sample is explained by the needs of the VEC model estimation, exposed in the next section. The beginning of the sample was chosen because of the availability of the Economic Activity Index of the Central Bank of Brazil (IBC-Br). We did not employ the data from 2016 because the unstable behavior of Brazilian economy generates residuals that do not fit conditions such as homoscedasticity, normality, and absence of autocorrelation.
- 14.
In Brazil, the 2012/14 high SOB’s regime is usually seen from two opposing perspectives. One praises it as a countercyclical action against the fall of the private credit supply; the other criticizes it as excessive activism aimed at sustaining artificially the pace of growth achieved in 2010 and 2011. In between, there is a third view that considers the greater amount of public credit offered as a result of a market dispute between federal commercial banks (such as Banco do Brasil and Caixa Federal) in a context of credit rationing by private banks, which were resisting the reduction of the central bank’s interest rate.
- 15.
These series were extracted from the Time Series Database of the Central Bank of Brazil (BCB). Accessed on March 10, 2017.
- 16.
The extraction of the cycle presented only exception, namely the series referring to the benchmark interest rate; for this reason, it only received treatment for seasonality.
- 17.
Campbell and Perron (1991) discuss the concept of co-integrated vector and sustain that: “Second, definition 1 does not require that each of the individual series be integrated of order one; some or all series can be trend-stationary. In this respect definition 1 differs from the definition given in Engle and Granger (1987)” (p. 165). In addition, according to Johansen (1988), a vector X t with k elements is considered as I(1) if this vector X t is non-stationary and ∆X t is stationary. Thus, if the linear combination β'X t is stationary, the system is co-integrated. This definition contains the co-integration concept of Engle-Granger, but establishes the possibility of some elements of X t being defined as I(0).
- 18.
Regarding the debate and evidence that emphasize the Brazilian case, see, among others, Hermann (2010), Modenesi et al. (2012), Oliveira (2014), Bonomo et al. (2014), Rezende (2015), World Bank (2012, 2015), Coleman and Feler (2015), and Unctad (2016). Krznar and Matheson (2017), in a recent paper about financial and business cycles in Brazil, concluded that the “… active countercyclical role of public banks during the global financial crisis mitigated systemic risk, but also raised questions about the longer-term impact of public banks on the financial system as they are difficult to unwind; the evidence presented here suggests that reducing the size of public banks would entail a negative impact on output over time. Moreover, the rapid expansion of public banks since 2008 contributed to a deteriorating fiscal position and raising doubts about the credibility of the policy framework. Focusing public banks’ activities on missing markets, such as providing guarantees for concessions, would improve the allocation of limited financing (…) and the effectiveness of monetary policy” (p.16).
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Cunha, A.M., Lélis, M.T.C., Haines, A.E.F., da Silva, P.P. (2017). The Brazilian Credit Market During the Great Recession. In: Arestis, P., Troncoso Baltar, C., Prates, D. (eds) The Brazilian Economy since the Great Financial Crisis of 2007/2008. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-64885-9_13
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