Federal Banking in Brazil

Policies and Competitive Advantages

Kurt e von Mettenheim

• Publisher: Routledge
• Year: 2015
• Edition: 1
• eBook ISBN:
  9781317323617
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

This study is the first in a decade to provide an overview of banking in Brazil. It is argued that the big three federal banks have long provided essential policy alternatives and, since the liberalization of the industry in the 1990s, have realized competitive advantages over private and foreign banks.

1 GOVERNMENT BANKING THEORY

The Anomaly

This book began when I opened the morning paper in São Paulo on 21 June 2001. Finance Minister Pedro Malan and Central Bank President Arminio Fraga had capitalized Brazilian federal banks to meet Bank for International Settlement (BIS) Basel II Accord guidelines for capital risk. The image of a US-trained economist and advocate of liberalization and privatizations aside a former emerging markets trader at the Soros Fund announcing the capitalization and reform of government banks seemed very odd. Was this another bailout of bureaucrats? Why did reformist President Fernando Henrique Cardoso capitalize rather than privatize these banks after seven years in office, just a year before a decisive campaign to elect his successor? Was this a return to Brazilian statism? Did private banks somehow conspire or acquiesce to keep out foreign competitors (having acquired state government banks and large market shares themselves)? Were Brazilian federal government banks simply too big to fail or too broke to privatize? A mental experiment came to mind. What would a US president do with three big banks? President Andrew Jackson’s veto of the Second Bank of the US in 1832 made it hard to imagine a US federal bank (I later learned of Abraham Lincoln’s advocacy of a National Bank and the US Postal Bank, 1945–8). But the experiment stuck. It seemed impossible that having three big banks under government ownership and control made no difference for policy and political economy.

Understanding these differences was not easy. A glance at primary materials confirmed that each federal bank has a long history and still-marked place. Founded to finance the Portuguese empire in 1808, the (third) Banco do Brasil remains the largest financial conglomerate in Latin America and primary agent in Brazilian capital markets, agriculture and agro-industry, international trade and export finance. Founded as an act of royal philanthropy in 1861, the Caixa Econômica Federal (Federal Savings Bank, Caixa) led during most of the twentieth century in terms of popular savings and credit, urban development, sanitation and directed credit for housing while providing social benefits such as pensions, unemployment funds and income grants. Founded in 1952, the Banco Nacional de Desenvolvimento Econômico e Social (National Economic and Social Development Bank, BNDES) has since provided long-term credit to infrastructure and strategic economic sectors, coordinated privatizations during the 1990s, and remains a major source of corporate finance, agent for new development strategies, manager of directed credit programmes, export-import bank, leading underwriter of initial public offerings and mergers and acquisitions, the globalization of Brazilian firms and source of liquidity during financial crises, notably during the recent global crisis.¹

Table 1.1: Largest Twenty-Five Banks in Brazil, 2006.

Source: Central Bank of Brazil. Top fifty banks, available at www.bcb.gov.br

Note: * = federal government bank. ** = state government bank. FA/EQ = fixed assets / equity.

Basel = Basel II Accord Index of Capital Adequacy.

Brazilian federal banks remain commanding heights. Not in the sense of Clause IV of the 1918 British Labour Party programme that has come to symbolize unrealized aspirations of European socialism. Nor do they solely pursue rapid industrialization as emphasized by Gerschenkron, Myrdal and Lewis in the 1960s and 70s. There is no single doctrine behind these institutions. They were captured by rent seekers under military rule (1964–85) and traditional elites to feed inertial inflation during the 1980s and early 90s. However, instead of following the theory of financial repression and recommendations from abroad to privatize state enterprises (especially banks) to free markets, Brazilian policy-makers capitalized federal banks and challenged these institutions to reform and develop new strategies for faster growth and social inclusion. Comparisons with private and foreign bank performance in Brazil and three case studies suggest that they have done so, certainly more than the still widespread belief in privatization would expect.

Before we get to the argument, a look at federal banks and banking in Brazil is in order. Table 1.1 reports the US dollar value of assets, net worth, net annual profits and deposits, the number of employees and branch offices and the Basel Index and ratio of fixed assets to equity for the largest twenty-five banks in Brazil at year-end 2006. The Banco do Brasil, Caixa and BNDES remain three of six financial institutions that dominate domestic banking. The global integration of Santander (having acquired São Paulo state bank Banespa) and ABN-Amro (having acquired the Brazilian private bank Real) placed a new foreign bank near the top five. Merger between Itaú and Unibanco in 2009 created the largest private bank in Latin America and bumped Bradesco from second place. In 2008, Banco do Brasil acquisition of Nossa Caixa (São Paulo state savings bank) and purchase of 51 per cent stake in Votorantim Bank reasserted its first place and further concentrated the industry. Banking in Brazil thus centres on three federal banks, two private domestic banks (Bradesco and Itaú-Unibanco) and one new foreign bank (Santander). Six banks thereby increased market share of bank assets in Brazil from 60.6 per cent in 2006 (R$566.7 of R$934.4 billion) to 76.5 per cent in September 2009 (R$1.53 of R$2.0 trillion).²

The data also suggest that federal banks are not black holes. Returns on assets, profits, liquidity, measures of capital risk, reserves against losses, level of bad and late loans, efficiency ratings and many further indicators presented in this study suggest that the Banco do Brasil, Caixa and BNDES remain competitive financial institutions fifteen years after opening the industry to foreign competition and ten years after privatization of most state government banks. This is the anomaly for neo-liberal theory. Federal banks remain at the top of Brazilian banking fifteen years after price stability, privatizations and opening the industry to foreign competition.

Trends in lending, bad loans and bank returns confirm this anomaly. The trajectory of public, private and foreign bank lending in Brazil as a percentage of GDP from 1988–2009 suggest that liberalization, privatization of state government banks and reform of federal banks have transformed the industry. A new division of financial labour has replaced the state-centred system built during the twentieth century under national populism, developmentalism and military rule (see Figure 1.1). From 1988 at the brink of hyperinflation to 2001 (when bad credits were transferred to an asset management entity at Treasury in June), credit from government banks declined from 23.8 to 8.2 per cent of GDP. However, government bank credit almost doubles after 2001 to reach 16.0 per cent of GDP by March 2009. Private bank lending also dropped to 6.0 per cent of GDP under instability by 1990, but surpassed the value of government bank credit during 2001 to reach 26.5 per cent of GDP by 2009. Foreign banks also gradually increased market share from below two per cent of GDP in 1990 to 8.7 per cent by 2009. This data is disaggregated in Chapter 2 and case study chapters.

Figure 1.1: Government, Private, and Foreign Bank Lending as percentage of GDP, 1988–2009.

Source: Central Bank of Brazil, Sisbacen, 2009.

Increased credit can simply be bad credit that will never be repaid. Bad credit is thus a standard measure of quality in banking and bank systems. Data from the Central Bank of Brazil suggest that the performance of government banks has converged toward levels of private and foreign banks operating in Brazil (See Figure 1.2). Bad credit in government banks rose during economic instability in the early 1990s (from 12–22 per cent 1989–92) and again during economic crises (14–22 per cent in 1999 and 15–19 per cent in 2003). Early peaks of bad credit in government banks also reflect acquisition of late and non-performing loans from private and public banks assumed by the federal government during the 1995–6 banking crisis (one caused by price stability examined in Chapter 2). Since privatization of state government banks in the late 1990s and cleanup and capitalization of federal banks in 2001, peaks of bad credit in government bank portfolios reflect their counter-cyclical role. Bad credit increases during crisis and downturn. However, the trend is clear. Since economic recovery in 2003, the value of bad credit held by government banks fell under 10 per cent of total credit, breaching the difference between government, private and foreign banks. Government banks have converged toward the performance standards of foreign and private banks operating in Brazil.

Figure 1.2: Bad Credit in Government, Private and Foreign Banks, Percentage of Total Loans, 1988–2009.

Source: Central Bank of Brazil, Sisbacen, 2009.

Table 1.2: Government, Private and Foreign Bank returns in Brazil, 2000–6.

Note: RLA = returns on liquid assets, ROA = returns on assets.

Source: Central Bank of Brazil, Financial Stability Reports, 2002–6.

Further evidence that government banks have performed well since capitalization and reform in 2001 can be seen by comparing their returns with private and foreign banks from 2000–6 (see Table 1.2). Transition toward international financial reporting standards at the Central Bank of Brazil breaks the time series after 2006, but case studies and further comparisons confirm this trend through adjustment to the recent financial crisis and recovery during 2008–10.

Losses during 2001–2 reflect the reality that banks confronted 1) an economic shock due to energy shortages, 2) capital flight from Brazil in the wake of the 11 September attacks on the US and 3) perceptions of political risk during 2002 that produced further capital flight, a twofold devaluation of the real against the US dollar, inflationary pressures and the need for tougher adjustment that reduced bank lending. Lower government bank returns during 2001–2 also reflect downsizing from reforms. However, strong returns at government banks since 2001 suggest that these institutions performed better, on average, than private domestic banks. And since recovery during 2003, government banks have reported returns almost double those of foreign banks. High interest rates and bank spreads, the concentration of the industry, different portfolios and policies and barriers to competition may partially explain these results. But comparison of returns sums with the data on bank size, performance and market shares to introduce our anomaly for liberal theory. Since 2001, federal banks in Brazil have converged towards and often outperformed private and foreign banks.

The Explanation

Our explanation of this anomaly is that Brazilian federal banks provide policy alternatives and retain competitive advantages. This checks preferences for privatization and counters two further bodies of scholarship, critics of government banking in the new political economy and views of politics and statism in Brazil as largely dysfunctional. To counter recent critics of government banking, we return to fundamentals of banking theory and classics in political economy such as Polanyi, Gerschenkron, Shonfield and Zysman. This study also suggests that views of Brazilian politics and policies are dated and biased. There is now gradual recognition that problems after transition from military rule have given way to new developments under democracy. But accounts of Brazil remain biased by idealized views and slippery benchmarks from older democracies and advanced economies.³ Political development in Brazil was reversed by military coup in 1964. Brazilian politics also proved disappointing during the terribly prolonged transition from military rule (formally 1985, but really 1974–94!). This study examines change after 1994, a better baseline year because it combined the first full national elections after military rule and the Real Plan that restored price stability after a decade of record inertial...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• List of Figures and Tables
• Introduction
• 1 Government Banking Theory
• 2 Bank Change in Brazil
• 3 The Banco do Brasil – with Maria Antonieta del Tedesco Lins
• 4 The Caixa Economica Federal (Federal Savings Bank)
• 5 The Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development, BNDES)
• Conclusion
• Notes
• Works Cited
• Index