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How to Make Bankers Richer: The Brazilian Financial Market with Public and Private Banks

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  • Alexandre Rands

    () (Datamétrica Consultoria, Pesquisa e Telemarketing)

Abstract

In this paper the literature on state owned banks and on the determinants of high spread and profitability of Brazilian banks are briefly reviewed. Then the paper proceeds to forward the hypothesis that the way state owned banks have interacted with public owned banks in the market is partially responsible for such high profitability and interest rates spreads of Brazilian banking system. A model is presented to explain how this interaction can generate this profitability and spreads. The results also show that governments that stretch social policies are those that are most likely to raise profitability and spreads. Furthermore, the model also shows that if the government is generous with employees of state owned banks, it will also contribute to the profit performance of private banks and high interest rates spreads. Two empirical tests of the major hypothesis of this paper are presented. Both rely on time series data for the Brazilian economy, but one of them estimates a structural expanded CAPM model for banks, while the second one uses a Factor Augmenting Vector Auto-Regression (FAVAR) model. Both tests give support to the major hypothesis.

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Bibliographic Info

Paper provided by Datamétrica Consultoria Econômica in its series Working Papers with number 37.

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Length: 41 pages
Date of creation: 2008
Date of revision: 2008
Publication status: Published in The Quarterly Review of Economics and Finance, v. 48, p. 217-236, 2008.
Handle: RePEc:dtm:wpaper:37

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Related research

Keywords: State owned banks; bank interest rates spreads; bank profitability; regulation of financial markets.;

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References

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  1. Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer, 2000. "Government Ownership of Banks," Harvard Institute of Economic Research Working Papers 1890, Harvard - Institute of Economic Research.
  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  3. Márcio I. Nakane, 2001. "A Test of Competition in Brazilian Banking," Working Papers Series 12, Central Bank of Brazil, Research Department.
  4. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  5. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
  6. Thorsten Beck & Ross Levine & Norman Loayza, 1999. "Financial Intermediation and Growth: Causality and Causes," Working Papers Central Bank of Chile 56, Central Bank of Chile.
  7. Márcio I. Nakane & Daniela B. Weintraub, 2004. "Bank Privatization and Productivity: Evidence for Brazil," Working Papers Series 90, Central Bank of Brazil, Research Department.
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  9. Agnes Belaisch, 2003. "Do Brazilian Banks Compete?," IMF Working Papers 03/113, International Monetary Fund.
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Cited by:
  1. Uwe Vollmer & Diemo Dietrich & Ralf bebenroth, 2009. "Behold the 'Behemoth'. The privatization of Japan Post Bank," Discussion Paper Series 236, Research Institute for Economics & Business Administration, Kobe University.

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