State Bank Transformation in Brazil - Choices and Consequences

Abstract

This paper analyzes the different options - liquidation, federalization, privatization and restructuring - that the Brazilian state government had for the transformation of state banks under the Programa de Incentivo a Reducao do Setor Publico Estadual na Atividade Bancaria (PROES) in the late 1990s. Specifically, the paper explores (i) the factors behind the states' choices and (ii) the effects of the transformation process on bank performance and efficiency. We find that states that were more dependent on federal transfers, whose banks were already under federal intervention and that established development agencies were more likely to relinquish control over their banks and transformation processes. We find that privatized banks improved their performance, while restructured banks did not.

Keywords: Bank privatization, Brazil, bank performance

JEL Classification: G21, G28, H77