Government Banks and Interventions in Credit Markets 
The credit supply literature offers no theoretical or empirical consensus on how interventions involving increases in credit supply by government banks affect financial and real outcomes or on through which mechanisms these effects work, especially outside of crisis episodes. This paper addresses those questions by studying a large and unexpected credit market intervention that the Brazilian government implemented in 2012 through two of its largest commercial banks. The intervention did not occur during a crisis period; the country’s economy was growing, and banks and borrowers were not in distress. The program increased the supply of credit from these government banks to small and midsize firms in particular at subsidized interest rates, which presumably would lead to a reduction in interest rates and an increase in credit access at private banks. The paper analyzes the implications of the intervention for lending rates, loan originations, debt outstanding, default, and real effects at the firm and regional levels.
Key Findings
- The intervention is associated with a large increase in loan originations and debt from government banks and a reduction in the lending rates of private banks.
- Firms that obtained loans issued by government banks during the intervention were more likely to default on those loans relative to comparable firms that borrowed from private banks. This relative increase in delinquency was driven entirely by ex ante levered firms, suggesting that public banks eased their lending standards for and favored levered firms.
- Despite the large increase in credit supply induced by the intervention, the real effects at the firm level were small; that is, there was no substantial change in employment growth.
- The regional-level real effects were substantially greater than the firm-level real effects, which points to the significant general equilibrium and spillover effects of such a large-scale intervention.
- Although the regional-level effects were greater than the firm-level level effects, they were smaller than the regional-level effects estimated in the credit-supply literature, which generally focuses on government interventions during crises.
- The presence of bank branches does not account for the increase in credit for firms in a given municipality. Instead, there is evidence of firms borrowing from government banks without branches in their municipalities after the program was implemented.
Implications
The finding that the regional effects were smaller than those from other interventions studied in the credit supply literature indicates that government interventions in credit markets may be less effective outside of economic downturns. In addition, the results concerning the effects of the presence or absence of local bank branches suggest that studies analyzing large credit supply shocks should consider the locations of both the banks and the borrowers and the potential for cross-market borrowing as a response to those shocks.
Abstract
We study a large-scale quasi-experiment in the Brazilian banking sector characterized by an unexpected and macroeconomically relevant increase in lending by commercial government banks. Using credit registry data, we find that this intervention led to a reduction in lending rates, but it did not lead to a change in private banks’ credit supply. Firms reliant on government banks experienced a substantial increase in debt, and government banks faced a large increase in loan defaults driven by indebted firms. We find a small increase in employment at the firm level, suggesting limited direct benefits of the intervention. At the regional level, we find that branch presence cannot explain credit growth due to cross-market borrowing. Once we account for this channel, we find real effects at the regional level that are substantially larger than those at the firm level, emphasizing the general-equilibrium effects of large-scale interventions.