Question & Answer with CFSP Member Gabriel de Abreu Madeira

Examining Financial Intermediation in Brazil
November 2, 2012

Q. How do you describe your research project and the questions you’re seeking to answer to non-economists?

In general, there has been a huge increase in financial intermediation in Brazil. The amount of credit has boomed since the beginning of the last decade. There has also been a huge improvement in the geographic penetration of financial systems. For example, we have these banking correspondents, which are non-bank businesses—like local merchants that work as tiny bank branches—providing savings, credit and also payment instruments.

At the same time, Brazil is developing quite rapidly and growing a lot. And it's very hard to know how relevant financial intermediation, which includes collecting savings, providing loans and payment instruments, is to this whole process. With my research, I’m trying to get an understanding about the impacts that bank intermediation has on everything that’s going on in the country.

Also, right now we have a very good opportunity to look at the frictions that may hamper access to financial intermediation. In some areas of Brazil, there is still a lack of intermediation. We review and map that absence, and we chart the crucial ingredients that should be in a model so that we can understand where we can improve access and how this would affect the whole economy.

In short, what we’re doing now is the first stage: We are collecting a lot of data and putting it together, trying to analyze this data and find clues about what may be behind the patterns that we find. In the second stage, we will start thinking about the conceptual frameworks that will allow us to understand the data, and get a notion of what we should look at next.

There are several questions we seek to answer.  First of all, what is the impact of financial expansion on real growth? We want to identify the impact of intermediation on development. This is the key question, but not the only one. For example, in thinking about the shocks that affect specific areas of the country, shocks that affect specific agents, how well does the banking system protect agents against those shocks? How relevant is the role of the banking system and how is this role evolving over time? We have to build models to answer these kinds of questions.

There’s also another interesting aspect, which comes from the fact that, in Brazil, much of the financial system is heavily regulated: if you’re running a financial institution you have to fulfill many requirements. This is something particular to Brazil and very important for the Brazilian system, and we would like to understand how this affects the role of the banking system. Also, we see this as an opportunity to address some of our theoretical questions. For instance, if you’re a bank and you’re collecting savings, you are required by law to create credit for the housing system, for specific kinds of loans. This generates variations in the data that can be explored for a theoretical purpose. I’m not sure if this is good or bad for the country, but it's interesting for the analysis of data.

 

Q. What do you hope to contribute to the understanding of financial systems and poverty with your project?

At this point, we have a goal to put data in a format that allows us to answer a lot of questions. We have some specific questions. For instance, we are interested in housing credit in Brazil. If you look at the Brazilian data on credit, you’re going to see that the amount of credit as a fraction of the GDP is low, but mostly because housing credit is low. And we have a serious problem of housing deficit in Brazil, so we have slums, and large families living in one household. This is one question that I think is very interesting, and it also relates to the research that’s going on in the U.S. with housing and mortgages and so on. Another aspect that I’m interested in is career choice or occupation choice. Specifically, how credit affects the specific business sector someone engages in and whether he or she will be an entrepreneur or not.

In general, what we hope to achieve with this project is to inform policymakers and politicians in their design of policies and how to reform the system. The ultimate goal of this project is to inform policy.
 

Q. What interested you in this line of research?

Of course, I’m quite interested in the impact of intermediation on development, on risk sharing, on welfare, all of this. But on a theoretical level I’m also interested in the nature of the frictions that prevent intermediation from achieving its full potential. There are informational frictions that come from the fact that banks are imperfectly informed about borrowers, there are commitment frictions since borrowers are not always willing or able to repay, and there are legal frictions that arise from the limitations of the legal system to enforce contracts. These are the issues that I’m interested in on a theoretical level, and this research is a very nice opportunity to look at them.

In short, the role of this research is to take advantage of this huge change we have in Brazil and the very nice data they have in the Central Bank, in order to talk not only about Brazilian issues, but also development issues in general as they relate to financial intermediation.
 

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