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.

Keywords: Financial Crises; State-Owned Banks; Local Economic Activity

JEL Classification: E44, E51, E65, G01, G21, H81, J23, R11, R5