Why does Brazil’s banking sector need public banks? What should BNDES do?

Abstract

One of the essential functions of the financial system is to provide the long-term funding needed for long-lived and expensive capital assets. However, one of the main difficulties of the current private financial system is its failure to provide such long-term financing. The paper specifically considers the short-termism in Brazil’s financial market as a major obstacle to financing long-term assets. There has been much discussion about how to support private long-term finance in order to meet Brazil’s growing infrastructure and investment needs. In its current form, the National Economic and Social Development Bank (BNDES) is the main source of long-term funding in the country. However, BNDES has been subject to a range of criticisms, such as crowding out private sector bank lending, and it is said to be hampering the development of the local capital market. The paper argues that, rather than following the traditional approach to justify the existence of public banks, based on market failures, finding an effective answer to this question requires a theory of financial instability. JEL Classifications: E00, E4, E6, G00, G1