Are Public Banks pro-Competitive? Evidence from Concentrated Local Markets in Brazil

Joao M. De Mello, PUC-Rio
Christiano Arrigoni, BACEN
Leonardo Rezende, PUC-Rio

Abstract

We extend Bresnahan and Reiss’s (1991a) framework in order to measure the competitive effect of public ownership of banks in concentrated local banking markets in Brazil. We use variation in market size, the number of competitors and their identity to infer how conduct of private banks is affected by the entry of a public bank. We find that, while local markets whose structure is private bank duopoly are more than 35% larger than private monopolies, duopolies with one public and one private bank and private monopolies are no different with respect to market size. These results suggest that, while the presence of private banks toughens competition, public banks do not affect conduct.