FEDERAL BANKING IN BRAZIL: POLICIES AND COMPETITIVE ADVANTAGES FINANCIAL HISTORY Series Editor: Robert E. Wright Titles in this Series 1 Slave Agriculture and Financial Markets in Antebellum America: Th e Bank of the United States in Mississippi, 1831–1852 Richard Holcombe Kilbourne, Jr 2 Th e Political Economy of Sentiment: Paper Credit and the Scottish Enlight- enment in Early Republic Boston, 1780–1820 Jose R. Torre 3 Baring Brothers and the Birth of Modern Finance Peter E. Austin 4 Gambling on the American Dream: Atlantic City and the Casino Era James R. Karmel 5 Government Debts and Financial Markets in Europe Fausto Piola Caselli (ed.) 6 Virginia and the Panic of 1819: Th e First Great Depression and the Commonwealth Clyde A. Haulman 7 Towards Modern Public Finance: Th e American War with Mexico, 1846–1848 James W. Cummings 8 Th e Revenue Imperative: Th e Union’s Financial Policies during the American Civil War Jane Flaherty 9 Guilty Money: Th e City of London in Victorian and Edwardian Culture, 1815–1914 Ranald C. Michie 10 Financial Markets and the Banking Sector: Roles and Responsibilities in a Global World Elisabeth Paulet (ed.) 11 Argentina’s Parallel Currency: Th e Economy of the Poor Georgina M. Gómez 12 Th e Rise and Fall of the American System: Nationalism and the Develop- ment of the American Economy, 1790–1837 Songho Ha 13 Convergence and Divergence of National Financial Systems: Evidence from the Gold Standards, 1871–1971 Patrice Baubeau and Anders Ögren (eds) 14 Benjamin Franklin and the Invention of Microfi nance Bruce Yenawine, ed. Michele Costello 15 Th e Development of International Insurance Robin Pearson (ed.) Forthcoming Titles Th e Development of the Art Market in England: Money as Muse, 1730–1900 Th omas M. Bayer and John R. Page Camille Gutt and Postwar International Finance Jean F. Crombois www.pickeringchatto.com/fi nancialhistory FEDERAL BANKING IN BRAZIL: POLICIES AND COMPETITIVE ADVANTAGES by Kurt E. von Mettenheim london PICKERING & CHATTO 2010 Published by Pickering & Chatto (Publishers) Limited 21 Bloomsbury Way, London WC1A 2TH 2252 Ridge Road, Brookfi eld, Vermont 05036-9704, USA www.pickeringchatto.com All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior permission of the publisher. © Pickering & Chatto (Publishers) Ltd 2010 © Kurt E. von Mettenheim 2010 British Library Cataloguing in Publication Data Mettenheim, Kurt von, 1957– Federal banking in Brazil: policies and competitive advantages. – (Financial his- tory) 1. Banco do Brasil. 2. Caixa Economica Federal (Brazil) 3. Banco Nacional de Desenvolvimento Economico e Social (Brazil) 4. Banks and banking, Centra – Brazil. 5. Monetary policy – Brazil. I. Title II. Series 332.1’1’0981-dc22 ISBN-13: 9781848930650 e: 9781848930667 ∞ Th is publication is printed on acid-free paper that conforms to the American National Standard for the Permanence of Paper for Printed Library Materials. Typeset by Pickering & Chatto (Publishers) Limited Printed in the United Kingdom at MPG Books Group, Bodmin and King’s Lynn CONTENTS Acknowledgements ix List of Figures and Tables xi Introduction 1 1 Government Banking Th eory 5 2 Bank Change in Brazil 29 3 Th e Banco do Brasil – with Maria Antonieta del Tedesco Lins 59 4 Th e Caixa Economica Federal (Federal Savings Bank) 101 5 Th e Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economic and Social Development, BNDES) 145 Conclusion 173 Notes 183 Works Cited 205 Index 219 ACKNOWLEDGEMENTS Th is book was written at the Fundação Getulio Vargas Escola de Administração de Empresas de São Paulo (Getulio Vargas Foundation São Paulo Business School, FGV-EAESP) and University of Oxford Centre for Brazilian Studies. Research began in 2002–3 with support from GVpesquisa (FGV-EAESP research fund) and the Fundo de Àmparo a Pesquisa do Estado de São Paulo (São Paulo State Research Fund, FAPESP). Discussions with Lourdes Sola, Moisés Marques, Maria Rita Loureiro and the late Eduardo Kugelmas about the construction of monetary authority helped launch this study. Chapter 4 began as a course on political sociology prepared for the management trainee programme of the Caixa Econômica Federal (Federal Savings Bank, Caixa). Trainees were keenly aware of crony credit and jobs-for-votes trading at the bank. However, they were also inspired by reforms that sought to shift policies toward bankless Brazilians. Early ideas about savings banks and epistemic communities were presented at meetings of the International Political Science Association Research Committee on Democratisation. A Lecturership in Brazilian Studies at St Cross College made it possible to convene a workshop on Brazilian federal banks in February 2004 and complete a fi rst draft . Th anks are due Leslie Bethell, Peter Evans, Jenny Corbett, Mariano Laplane, Valpy Fitzgerald, Leonardo Martinez, André Carvalho, Robert Bruce Hall, Albert Fishlow and colleagues and students at the Centre for comments and suggestions. Special thanks are due to Laurence Whitehead and Antonio Barros de Castro. Revisions at EAESP incorporated suggestions from anony- mous readers and members of our research group on Banking Democratisation, especially co-author of Chapter 3, Maria Antonieta del Tedesco Lins and research assistants Ivan Salomão, Cesar Mori, Gustavo Martucci, Lívia Tomi- naga and João Maeda. Colleagues and students in the Graduate Programme in Public Administration and Government and, especially, our research group on state reform and public policy (Fernando Abrucio, Luiz Carlos Bresser Pereira, Maria Rita Loureiro, Regina Pacheco) provided further comments. An international seminar on public banking convened in São Paulo in August 2006 refi ned comparative and theoretical perspectives. Support from – ix – x Federal Banking in Brazil the Konrad Adenauer Foundation and GV pesquisa helped bring political scientists, fi nancial economists, fi nancial statisticians and executives from inter- national fi nancial institutions and public banks together to assess government banking, development policies and social inclusion in advanced and developing nations. Barbara Stallings, Rogerio Studart, Andreas Hackethal, Frédéric Boc- cara, Olivier Butzbach and José Mena provided insightful presentations about banking in Europe, Asia and Latin America. Alkimar Moura, Brasilio Sallum, Carlos Augusto Vidotto, Luiz Carlos Bresser Pereira and Maria Rita Loureiro read the manuscript as submitted for transition to full professor in the chair of political sociology at the EAESP Department of Social and Legal Sciences. Th e University of Washington Department of Politi- cal Science provided offi ce space and access to the Suzallo library during July 2007 for reading in the political economy of banking. Presentations on savings bank modernization delivered to senior Caixa management and staff during 2008 and access to untapped historical materials at Caixa archives in São Paulo and Brasilia helped expand the scope of this study. Finally, Armando Vieira and Natalia Fingermann provided assistance while Daire Carr and staff at Pickering & Chatto ensured timely editing and production. LIST OF FIGURES AND TABLES Figure 1.1: Government, Private, and Foreign Bank Lending as percent- age of GDP, 1988–2009 8 Figure 1.2: Bad Credit in Government, Private and Foreign Banks, Per- centage of Total Loans, 1988–2009 9 Figure 1.3: Four Th eories of Government Bank Change 15 Figure 2.1: Government, Private, and Foreign Bank Credit to the Federal Government, 1995–2009 35 Figure 2.2: Bad Credit in Government, Private and Foreign Bank Lend- ing to Federal Government, 1988–2009 36 Figure 2.3: Government, Private and Foreign Bank Credit to State and Municipal Governments, 1995–2009 37 Figure 2.4: Bad Credit in Government, Private and Foreign Banks to State and Municipal Governments, 1988–2009 38 Figure 2.5: Government, Private and Foreign Bank Credit to Industry, 1995–2009 39 Figure 2.6: Bad Credit in Government, Private and Foreign Banks to Industry, 1988–2009 39 Figure 2.7: Government, Private and Foreign Bank Credit for Home Loans and Construction, 1995–2009 40 Figure 2.8: Bad Credit in Government, Private and Foreign Banks for Home Loans and Construction, 1988–2009 41 Figure 2.9: Government, Private and Foreign Bank Rural Credits, 1995–2009 42 Figure 2.10: Bad Credit in Government, Private and Foreign Banks to Rural Entities, 1988–2009 43 Figure 2.11: Government, Private and Foreign Bank Credit to Business, 1995–2009 44 Figure 2.12: Bad Credit in Government, Private and Foreign Banks to Business, 1988–2009 45 Figure 2.13: Public, Private, and Foreign Bank Credit to Consumers, 1995–2009 46 – xi – xii Federal Banking in Brazil Figure 2.14: Bad Credit in Government, Private and Foreign Bank Credit to Consumers, 1988–2009 46 Figure 3.1: Banco do Brasil Share Price, 2000–4 96 Figure 3.2: Banco do Brasil Share Price, 2004–9 96 Figure 4.1: Caixa Market Share of Credit to Public and Private Sector, 1968–2003 125 Table 1.1: Largest Twenty-Five Banks in Brazil, 2006 6 Table 1.2: Government, Private and Foreign Bank returns in Brazil, 2000–6 9 Table 1.3: Liberal and Developmental/Coordinated Systems in Political Economy 20 Table 1.4: Comparing Funds for Public Policy with and without Govern- ment Banks 22 Table 2.1: Comparing Late Loans and Provisions in Banks, 2001–8 54 Table 3.1: Banco do Brasil Balance Sheet Summary, 2002–8, R$ billion