Lessons for Financial Regulation: The Brazilian Experience during the Financial Crisis
Abstract
This paper examines the crisis management role that can be performed by state-owned banks. Specifically, it criticizes the well-established prescription in academic debates over financial regulation, namely that there should be a strict functional segregation between the activities performed by state-owned commercial banks and central banks. In particular, such prescription implies that state-owned commercial banks should not be used as a crisis management vehicle. As this paper shows, under some circumstances the use of state-owned banks as an additional arm to manage financial crisis is not only justifiable but also desirable. Accordingly, the standard prescription of strict functional segregation must be qualified by a pragmatic consideration: during severe financial crises, orthodoxies may need to give space to expediency. This pragmatic view rehabilitates the importance of carefully reflecting upon the political economy of each country while discussing banking regulation. It also implies that general guidelines purporting to flatly apply to all countries should be approached with care. This is conspicuously the case of the OECD Guidelines on Corporate Governance of State-Owned Enterprises of 2005, a best practices checklist endorsed by the International Monetary Fund and the World Bank.