Government Banks and Interventions in Credit Markets

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 owned banks. Using credit registry data, we find that this intervention led to a reduction in loan interest rates by private banks with limited effects on their credit supply. Firms reliant on government banks experienced a large increase in debt, and government banks faced a significant increase in default driven by levered firms. We find a small increase in employment at the firm level, suggesting limited direct benefits of the increase in credit by the government. 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, but less than half of those from the literature.