State presence in the credit market: state-owned banks and earmarked credit in the 2008 crisis

Abstract The objective of this study was to document the relationship between the two mechanisms of state action (credit earmarking and corporate control of banks) and the granting of bank credit in Brazil during the 2008 global financial crisis. There is an intense debate in the literature about the effectiveness of the State’s role in the financial system and its effects on the economy. One aspect of this issue is identifying whether the state presence contributes to stabilizing the granting of credit and softening financial crises’ economic impact. The studies carried out to date have not considered the differences between free and earmarked credits at the bank level, nor their possible interaction with the type of bank property. The study’s subject is relevant because it can help guide counter-cyclical public policies to face crises, including the use of changes in credit earmarking or state-owned banks’ performance. The analyses carried out can inform the debate about the pros and cons of the state’s presence in the credit market. The study analyses data from 2005 to 2012 from financial institutions that capture deposits from the public. Inferences are based on linear regression models, including a wide range of control variables. This study documents a significant reduction in credit granted by private banks in Brazil and state-owned banks’ expansion during the 2008 crisis. This evidence is not only due to differences in the funding rate during the period or to economic fundamentals, suggesting that the effect of corporate control is possibly related to the counter-cyclical performance of state-owned banks. The results show that the credit earmarking mechanisms were not particularly relevant in smoothing the contraction resulting from the financial crisis. Resumo O objetivo deste trabalho foi documentar a relação entre os dois mecanismos de atuação estatal (direcionamento do crédito e controle societário de bancos) e a concessão de crédito bancário no Brasil durante a crise financeira global de 2008. Há intenso debate na literatura sobre a efetividade da atuação do Estado no sistema financeiro e seus efeitos sobre a economia. Um dos aspectos dessa questão é identificar se a presença estatal contribui para estabilizar a concessão de crédito e suavizar o impacto econômico das crises financeiras. Os estudos realizados até o momento não consideraram as diferenças entre os créditos livres e direcionados no nível dos bancos, nem sua eventual interação com