The Life-Cycle of National Development Banks: The Experience of Brazil's BNDES

Abstract

We posit a life-cycle hypothesis for the evolving role of National Development Banks (NDBs) using the case of one of the largest such institutions in the world, the Brazilian Development Bank (BNDES). NDBs are a particularly important institution for channeling long-term credit in less developed financial markets. However, we argue that as countries develop their financial markets, NDBs should share this role with other local banks and specialize their focus, eventually disappearing altogether. In the Brazilian case, we show how the BNDES evolved from a purveyor of long-term credit to a more complex financial institution. The BNDES was the most important tool used by the Brazilian government as a countercyclical response to the financial crisis. For many developing countries, institutions like the BNDES may be a tenable solution for building long-term local financial institutions and markets, and developing specialized human capital. However, they also pose potential risks centered on issues of scalability, crowding out, graft and inefficiency.

Keywords: Development Banks; Financial Crisis; Institutional Void; Long-term Credit

JEL Classification: H81; H54; O14; O16