In September 2008, the collapse of the Lehman Brothers investment bank precipitated a financial crisis and a sharp decline in international credit. Massive layoffs and an economic recession in the U.S. and many industrialized and developing countries ensued. In some countries, however, the effects of the financial crisis were limited and short-lived. This was true for Brazil and China, both of which continued to experience high rates of economic growth in subsequent years. A cited reason for these countries’ relative success during this period has been government involvement in the banking sector 1 .
In a recent paper with my co-author Leo Feler, we explore the argument that government banks can mitigate economic recessions. We create a unique database combining locality-level bank branch locations, locality-level balance sheets, employment censuses and additional locality-level controls 2 . This database, along with aggregate bank balance sheets, allows us to, first, assess the lending patterns of Brazil’s government and private banks at both the national and the locality-level. Secondly, we can assess the local economic impact of government banks during the financial crisis.
Our results suggest that localities with a higher fraction of bank branches that are government-owned, experienced better than expected changes in lending, output, formal sector employment, and the number of firms in operation during and immediately following the financial crisis. These localities continued to grow and did so faster than otherwise comparable localities with a smaller share of government bank branches.
As a variation of our locality-level results, we also assess whether the lending by government banks is concentrated in politically-aligned areas or in areas that are, by traditional measures, more bank dependent. In the Brazilian case, we find that lending was neither targeted to localities with more bank dependence nor that it was targeted politically. Instead, it was simply allocated to areas where government banks had a greater presence. We lastly assess the quality of the loan portfolio and find that, at least based on short-term outcomes, government banks did not relax their lending standards while increasing their lending.
These results should be interpreted with some caution. There is ample evidence that government banks are subject to political capture and that their lending can become politically motivated, with detrimental eﬀects (Dinc, 2005; Khwaja and Mian, 2005; Carvalho, 2012; and Barth, Caprio, and Levine, 2001). Even in Brazil, this was the case when individual state governments owned banks (Feler, 2012). While we find that government banks propped-up the economy in Brazil and prevented a deeper recession from occurring following collapse of Lehman Brothers, it is unclear what the longer-term implications of government bank intervention might be. At least during this crisis in Brazil, government bank lending had significantly positive and fairly immediate effects on output, on employment, and helped firms to remain in business.
Barth, James, Gerard Caprio Jr., and Ross Levine (2001). The Regulation and Supervision of Banks Around the World: A New Database. Brookings-Wharton Papers on Financial Services. Brookings Institution, Washington, DC. Robert Litan and Richard Herring, Eds., 83-250.
Carvalho, Daniel R. (forthcoming). The Real Effects of Government-Owned Banks: Evidence from an Emerging Market, Journal of Finance.
Dinc, Serdar (2005). Politicians and Banks: Political Influences on Government-Owned Banks in Emerging Markets. Journal of Financial Economics, 77(2), 453-479
Feler, Leo (2012). State Bank Privatization and Local Economic Activity. Johns Hopkins University, Mimeo.
Khwaja, Asim, and Atif Mian (2005). Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market. Quarterly Journal of Economics, 120(4), 1371-1411.
The Economist: http://www.economist.com/node/16078466?story_id=16078466 
1 The Economist (May 12, 2010) cites the CFO of Bradesco, a large private Brazilian bank, as saying that government banks in the country played a critical role in promoting anti-cyclical policies. Additionally, a former governor of Brazil’s Central Bank explained the consensus view in Brazil that government banks were important in propping-up the economy during the ﬁnancial crisis.