Elections, state-owned banks, and bank profitability in Brazil.
| Autor | Garcia, Alexandre Schwinden |
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Introduction
The political use of state-owned banks (SBs) is an essential question about their participation in financial systems. It is even more relevant in countries where these banks have extensive participation in financial systems like Brazil. Dinc (2005) notes that elections, in particular, can tempt politicians to use SBs for electoral projects and shows that government-owned banks increase their lending in election years in comparison to private banks. Iannotta et al. (2013) show that SBs have higher operational risk in election years, consistent with the idea that these banks pursue political goals. Carvalho (2014) highlights that the political control of financial institutions provides the ability to politically influence the choices of projects implemented in the economy, which helps explain government participation in the financial market through the control of financial institutions. Shleifer and Vishny (1994) and La Porta et al. (1998) point that control over loans by the government can lead to political influence on decisions in the real economy.
The most common reasons to justify the existence of SBs are social, development, and political (Coelho et al., 2013). For the social and development motivations, Jackowicz et al. (2013) highlight that SBs are used to fix market failures and finance projects that private credit is not interested in, but that have positive social externalities. In the political view, SBs do not aim to increase social welfare, but are tools to obtain and maintain political support. (1) According to each motivation, SBs may have a different maximization function. For example, Sapienza (2004) observes that from the social and development perspectives, SBs maximize social welfare rather than profits. On the other hand, in the political view, SBs aim to maximize the objectives of the politicians who control the banks.
This article aims to find evidence about the political use of Brazilian commercial SBs in election years and possible impacts on the profitability of these banks, testing the political motivation of the existence of SBs. We follow Micco et al. (2007) who tested whether there are differences in the performance of SBs as a result of election years, seeking to assess the political use of these banks. The article also tests the hypothesis that publicly traded state-owned banks (PTSBs) suffer less political interference and are less affected by lower profitability in election years compared to non publicly traded state-owned banks (NPSBs). Therefore, it aims to fill a gap observed by Dinc (2005), quantifying the costs of the political use of the SBs in election years for emerging countries. We measure the impacts of the political use of Brazilian SBs on their profitability. To our knowledge, this is the first study that analyzes these effects for Brazilian commercial SBs.
The participation of commercial SBs is very relevant for the Brazilian economy and banking system. As of December 2019, Banco do Brasil and Caixa Economica Federal (CEF), the two largest commercial SBs, account for about 37% of the credit stock and 29% of total assets in the Brazilian banking system. Thus, despite the country having undergone a privatization process in several sectors in the 1990s, the Brazilian banking sector still has relevant public institutions.
There is some evidence of the political use of SBs in Brazil, but not for commercial SBs. For example, Carvalho (2014) presents evidence of the political use of the National Bank for Economic and Social Development (BNDES) credit policy to shift employment to politically attractive regions and away from politically less-appealing areas, supporting the re-election of incumbent candidates. Likewise, Claessens et al. (2008) provide evidence that companies that contributed to politicians in the 1998 and 2002 election cycles substantially increased their bank financing, relative to a control group, after each election.
Segmenting our sample into NPSB, PTSB, and privately-owned banks (PB), some banking variables draw attention to the differences between electoral and non-election years. In non-electoral years, the average growth of the stock of credit operations is 3.3%, 3.2%, and 4.1% for NPSBs, PTSBs, and PBs, respectively. In electoral years, the average growth of the credit stock is 6.8% for NPSBs, 4.7% for PTSBs, and 4.1% for PBs. Credit risk, a variable that measures the quality of the loan portfolio, is 0.3% and 0.4% higher in election years for NPSBs and PTSBs. The financial margin is 0.3% lower in election years for NPSBs. Thus, these facts demonstrate a different behavior in the growth of the credit supply of SBs (NPSBs and PTSBs) in election years. In addition, the worse quality of the credit portfolio may justify lower profitability of these banks in election years due to its possible political use.
Dynamic panel models were estimated to search for evidence of the political use of SBs and their impacts on profitability. Because of endogeneity, unobserved heterogeneity, and persistence in bank profitability, we use System-GMM methods. Data are semiannual, taken from the Central Bank of Brazil (BCB) database, and the analysis period extends from the first half of 2000 to 2019. The sample consists of 182 SBs and PBs, totaling 3,505 observations. To isolate the effects of elections on bank profitability, we used some control variables such as banking variables and macroeconomic variables.
First, we find that years of federal and municipal elections do not impact commercial SBs profitability. However, when we segment SBs between PTSBs and NPSBs entities, electoral cycles harm the profitability of NPSBs. This result confirms the political motivation for the existence of NPSBs. The results show that listing SBs on the stock exchange may be relevant for reducing the use of Brazilian commercial SBs for political purposes. Moreover, the benefits go beyond the objectives relating to the capitalization of these banks and go hand-in-hand with the introduction of more external and internal controls, for example, through more participation by minority shareholders in corporate decisions.
The remainder of the article is divided into four sections. Section 2 presents a literature review emphasizing political influence on SBs and possible impacts on profitability. Section 3 shows the methodology and variables. Section 4 analyzes the estimated models. Finally, Section 5 presents the con elusions of the article.
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Literature review
2.1 State-owned banks and elections
Coelho et al. (2013) observe that the literature that pays attention to the existence of SBs has three lines of thought to explain their existence. The first considers that SBs are necessary to finance projects that have positive social returns but negative private returns, so they are not attractive for private credit. The second line of thought highlights that political economy explains the existence of SBs through loans to political allies and cycles of politically motivated loans. The third reason is related to the need to correct market failures and to encourage economic development. Furthermore, another justification for the existence of SBs is associated with inducing competition in the banking system. Coelho et al. (2013) reject this hypothesis for Brazil, stressing that the presence of a private competitor reduces the profits of private banks. However, the existence of a public competitor has little effect on private banks.
As for the economic development and market-failure explanations, La Porta et al. (2002) present evidence that SBs are associated with lower economic growth and that politicians capture these banks for their objectives and reduce these banks' efficiency as a consequence.
Korner and Schnabel (2011) partially reject the development view of SBs. The authors note that SBs are detrimental to economic development when the country has a less developed financial system and low institutional quality, providing some support for the political view of SBs for countries with such characteristics. They conclude that developed financial systems tend to mitigate principal-agent problems between politicians and bank managers, as SBs benefit from high financial standards. Examples are incentives to use new risk management techniques, knowledge, and expertise. These incentives could expand from private banks to SBs via better qualification of employees and better banking supervision and regulation. Hence, more competition may force SBs to provide better quality intermediation services. As for the degree of institutional development, good political institutions mitigate agency problems between society and politicians, reducing the abusive use of SBs by politicians.
In addition to SBs, there are other tools of political influence, including the use of non-financial state-owned companies or tax incentives. However, Carvalho (2014) observes that these tools generate a commitment problem because politicians cannot offer tax incentives for sufficient time and prefer to offer long-term loans with favored interest rates, whose costs are not transparent. Dinc (2005) lists four reasons why SBs are attractive for political use: (i) asymmetric information between public and third-party banks about the quality of a specific loan makes it easier to hide the political motivation behind a loan; (ii) the actual costs of any politically motivated loan may be deferred until maturity; (iii) nonfinancial state-owned companies operate in defined sectors, limiting the ability of politicians to transfer resources, while banks operate across the economy, providing politicians with more opportunity to channel resources; and, (iv) the political elite can maintain or increase its power over financial resources more efficiently than creating barriers in other sectors.
La Porta et al. (2002) note that SBs provide extensive control of the financing of projects, while the private sector...
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