In this presentation we provide an overview of the theory, architecture, financial indicators, and evidence on the role of public development banks around the world.
Section I shows that current adverse economic conditions and the need to advance in the SDG Agenda 2030 require to scale up affordable long-term financing with an industrial and social scope where public development banks could play a central role.
There are several complementary definitions of a development bank as the one by Eduardo Fernandez-Arias, Ricardo Hausmann and Ugo Panizza (2020) that define “development banks as government-owned financial institutions that have the objective of fostering economic or social development by financing activities with high social returns.
Xu et al. (2021) define Public Development Banks (PDB) and Development Financing Institutions (DFI) as financial institutions initiated and steered by governments with the official mission to proactively orient their operations to pursue public policy objectives. These institutions use market means to achieve development goals. Xu et al. (2021) set a five elements qualification criteria that should be simultaneously met to qualify an entity as a PDB or DFI: 1) being a stand-alone entity, 2) using the fund-reflow-seeking financial instruments (loans, equity investments, guarantees) as main products and services, 3) funding sources going beyond the periodic budgetary transfers, 4) have proactive public policy orientation, and 5) government steering of their corporate strategy.
Development banks could address financial market failures such as procyclicality of credit, credit misallocation due to imperfect information, lack of financing to high-uncertainty and high-risk innovative activities, and underfinance of activities with large externalities, social orientation and public goods provision.
When considering a public development bank, it is important to identify how this institution would address market failures not solved by the private sector and to avoid political capture and government failures as misallocation of credit and rent seeking.
Priority functions of public development banks include the provision of counter-cyclical financing, support countries and regions within countries that lag behind in the development process, improve social development, enhance financial inclusion, promote innovation and structural transformation, finance infrastructure investment, and support the provision of public goods.
Among the available tools are subsidies, long-term capital, guarantees, equity, technical assistance and research and development.
Section II of the presentation uses the database integrated by Xu, Jiajun, Régis Marodon, Xinshun Ru, Xiaomeng Ren, and Xinyue Wu. 2021. “What are Public Development Banks and Development Financing Institutions?——Qualification Criteria, Stylized Facts and Development Trends.” China Economic Quarterly International, we observed the following elements of the Global Public Development’s Banks Architecture.
Development banks are present in 150 out of the 193 countries in the World, with 8 global multinational development banks, 100 banks in Africa, 118 banks in America, 148 banks in Asia, 134 banks in Europe, and 20 banks in Oceania.
The 8 global banks have combined assets for USD 675 billion or 3% of total assets. The 100 banks in Africa have combined assets of USD 188 billion, equivalent to 1% of total assets and 8% of the continent’s GDP. The 118 banks in America have combined assets of USD 8,845 billion, equivalent to 40% of total assets and 33% of the continent’s GDP. The 148 banks in Asia have combined assets of USD 7,275 billion, equivalent to 33% of total assets and 22% of the continent’s GDP. The 134 banks in Europe have combined assets of USD 5,288 billion, equivalent to 24% of total assets and 25% of the continent’s GDP, while the 20 banks in Oceania have combined assets of USD 11 billion, equivalent to 0.05% of total assets and 1% of the continent’s GDP.
The presentation provides more details of the banks by subregions within each continent.
Classified by geographical ownership, there are 47 multinational, 370 national and 111 subnational development banks.
Classified by geographical operation, there are 8 global, 13 regional, 34 subregional and 473 national and subnational development banks.
Classified by official mandate, there are 190 banks with a general development flexible mandate, while there are 338 banks with a specific mandate, which include 35 focused in rural and agricultural development, 55 in export promotion, foreign trade and overseas investment, 35 in social housing, 31 in infrastructure, 30 in international financing of private sector development, 17 in local government and 135 in micro, small and medium-sized enterprises.
The presentation provides details of the countries with public development banks by mandate.
The oldest operating development bank is the Groupe Caisse des Dépôts France established in 1816, followed by the Cassa depositi e prestiti of Italy in 1850, the Banco Hipotecario del Uruguay in 1892, and KommuneKredit of Denmark in 1898. The rest of the institutions were established in the XXth and XXIst centuries.
The presentation shows the number of public development banks and development financing institutions established in each decade, showing the surge in the number with the reconstruction efforts after World War II and the prominence of investment-led capital accumulation growth theories in the 1950s.
The presentation also provides a timeline of the establishment of the 528 institutions showing their date of creation and their current size. It does so for the whole set of institutions and splits the information by mandate.
The multiple maps and graphs included in the presentation provide visual snapshots and more detail on the chronology of the Public Development’s Banks Architecture around the world.
Section III of the presentation uses data from 34,749 private banks and 854 public banks integrated by Bankscope to compare key financial indicators of banks by specialization, which allows to benchmark specialized governmental credit institutions and multilateral government banks.
These indicators show that public development banks have relatively large equity to assets ratio, which could give them room to leverage their position to further increase their credit portfolio, which is smaller, relative to assets, than the one of commercial banks. Specialized governmental credit institutions have much larger non-performing loans ratio and relatively high cost over assets ratio. The Return on Equity and the recurring earnings power of public banks are lower than those of private institutions.
Section IV provides evidence on the role of Public Development Banks and Development Financing Institutions. It reviews different cases as the provision of payroll credit to formal workers in Mexico through Fonacot.
It also reviews the provision of FIRA’s credits, guarantees, subsidies, training, technical assistance and technology transfers to the agricultural, rural and fishery sectors in Mexico.
It provides Musacchio et al. (2017) analysis of Corporación de Fomento de la Producción de Chile (CORFO), Business Development Bank of Canada, German Development Bank (KfW), Brazilian Economic & Social Development Bank (BNDES), Korean Development Bank, China Development Bank Corporation. After providing a brief history of these institutions it reviews the market failures and corresponding bank tools in each institution.
It summarizes Lazzarini et al. (2015), which studies the effect of loans and equity investments of BNDES and find that they do not have any consistent effect on firm-level performance and investment, except for a reduction in financial expenditures due to the subsidies accompanying loans. In addition, BNDES does not systematically lend to underperforming firms. These results indicate that BNDES subsidizes firms that could fund their projects with other sources of capital.
It also summarizes Sapienza (2004), which uses information on individual loan contracts to compare the interest rate charged to two sets of companies with identical characteristics borrowing respectively from state-owned and privately owned banks. It finds that State-owned banks charge lower interest rates than do privately owned banks to similar or identical firms, even if the company is able to borrow more from privately owned banks. It also finds that State-owned banks mostly favor firms located in depressed areas and large firms. The lending behavior of state-owned banks is affected by the electoral results of the party affiliated with the bank: the stronger the political party in the area where the firm is borrowing, the lower the interest rates charged.
It summarizes I. Sedar Dinç (2005) that provides cross-country, bank-level empirical evidence about political influences on government-owned banks, showing that they increase their lending in election years relative to private banks.
It provides a summary of the book titled The future of National Development Banks by Stephany Griffith-Jones and José Antonio Ocampo (2018), where they analyze National Development Banks (NDBs) in seven countries – China, Germany, Brazil, Mexico, Chile, Colombia, and Peru– and concluded that these banks tend to be successful overall. Griffith-Jones and Ocampo consider that these banks have been broadly efficient instruments of national development strategies in their respective countries, and they have helped to overcome major market failures in a flexible way. Their research identifies five crucial functions of NDBs in the development process: providing counter-cyclical finance; encouraging innovation and structural transformation; enhancing financial inclusion; supporting infrastructure financing; and promoting environmental sustainability, in particular by combating climate change. They claim that NDBs were strongly counter-cyclical in the wake of the global financial crisis. Also, they explain that NDBs have been innovative, notably in supporting new activities as technological advances, entrepreneurship, financial inclusion, and new sectors as renewables and energy efficiency.