Winners and Losers When Private Banks Distribute Government Loans: Evidence from Earmarked Credit in Brazil

25 Pages Posted: 6 Aug 2019 Last revised: 28 Apr 2020

See all articles by Jose Renato Haas Ornelas

Jose Renato Haas Ornelas

Banco Central do Brasil

Alvaro Pedraza

World Bank

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG)

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: July 30, 2019

Abstract

This paper studies credit allocation when government loan programs are distributed by private banks. The study focuses on Brazil, where private lenders can operate in two credit markets: competitive loans with own funding and earmarked loans that rely on government funds to finance firms at below-the-market interest rates. Using rich loan-level data between 2005-2016, the paper finds that banks are disproportionally more likely to extend earmarked loans to larger firms and firms with an existing credit relationship. The paper further documents a cross-selling strategy whereby banks increase the price of free-market loans of riskier borrowers that also obtain earmarked credit. Inadvertently, the government selects winners and losers, since mostly larger businesses, those that bank with the largest private lenders, and those willing to bundle free-market and earmarked loans disproportionally access the program.

Keywords: Legal Institutions of the Market Economy, Food Security, Public Sector Economics, Public Finance Decentralization and Poverty Reduction, Access to Finance, Banks & Banking Reform

Suggested Citation

Ornelas, Jose Renato Haas and Morales, Alvaro and Ruiz Ortega, Claudia and Silva, Thiago, Winners and Losers When Private Banks Distribute Government Loans: Evidence from Earmarked Credit in Brazil (July 30, 2019). World Bank Policy Research Working Paper No. 8952, Available at SSRN: https://ssrn.com/abstract=3430567

Jose Renato Haas Ornelas (Contact Author)

Banco Central do Brasil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distrito Federal 70074-900
Brazil

HOME PAGE: http://www.bcb.gov.br

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Claudia Ruiz Ortega

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, NW
Washington, DC 20433
United States

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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