Comment on: “Why is bank credit in Brazil the most expensive in the world?”

Abstract

The paper entitled “Why is bank credit in Brazil the most expensive in the world?” makes a fascinating review of the scientific literature about the determinants of credit spreads in Brazil. Lending rates in Brazil are known for being strikingly high for more than two decades and economists have been struggling to have a good understanding of the main drivers of the high spread between deposit and lending rates in the country The paper starts by presenting a fair description of the evolution of the Brazilian credit market since the end of the hyperinflation period (mid-1990s), which includes the evolution of the lending and deposit rates and total credit to the private sector over that period. Further, the paper discusses the continuous rise in bank asset concentration in Brazil since the mid-1990s and traces the evolution of Brazilian bank’s regulatory capital and liquidity ratios. From that, the authors suggest that higher concentration is part of a well-defined strategy of the Central Bank of Brazil to favor financial prudence over efficiency. In the last part of the paper, the authors summarize the empirical studies in the literature which show that market structure, credit risk, market concentration, and earned credit explain credit spreads in Brazil. In this short comment, I bring new ingredients to the debate on the causes of the high cost of credit in Brazilian economy, highlighting the importance of looking at proxies for bank conduct in the credit market, rather than concentration, and also at indicators of recovery rates for bank loans to access, respectively, competition and credit risk in the Brazilian credit market. First, the paper suggests there is a relationship between high lending rates in the Brazilian markets and the high concentration in the banking sector in Brazil. Indeed, concentration ratios capture structural features of a market, and are often used in structural models to explain competitive performance in the banking industry as the result of market structure. For instance, Bain (1956) shows that the Herfindahl-Hirschman Index (HHI), a common measure of market concentration, is positively related to the rate of profit in the industry. Nevertheless, it should be noted that a measure of concentration does not warrant conclusions about the competitive performance in a particular market. Even in a highly concentrated market, competitive behavior