Latin American public banks show strong potential to help address climate change and foster productive development
Public development banks represent 10 percent of lending in Latin America and the Caribbean
Public Development Banks (PDBs) in Latin America and the Caribbean provide more than $700 billion in loans annually and possess the operational and financial heft to expand into areas such as climate change mitigation and productive development policies, according to a study released today by the Inter-American Development Bank (IDB).
The study also urges these institutions to continue to strengthen their capacity, particularly in corporate governance area, and to demonstrate their development effectiveness in a way that further mobilizes private sector resources and supports the most vulnerable economic sectors.
The study examines the relevance of the PDBs in today’s financial systems, their financial and non-financial instruments, institutional factors key to achieving success, and how they can address new challenges such as climate change mitigation.
The region’s 56 PDBs include institutions such as the Banco Estado de Chile, the Banco de Desarrollo Empresarial de Colombia, and Mexico’s Nacional Financiera.
“The region’s public banks have generally ceased to be a burden on the fiscal accounts,” said Fernando de Olloqui, a financial markets specialist for the IDB and lead author of the study.”If they continue making financial and operational improvements and demonstrate their impact on development, these public finance institutions will be in an excellent position to consolidate their relevance over the next decade, particularly for addressing more complex challenges, such as climate change.”
Despite the existence of large institutions such as Brazil’s Banco Nacional de Desenvolvimento Economico e Social (BNDES), the relative importance of the development banks in terms of their countries’ overall financial systemshas remained static for the past 10 years. PDB lending averages about 10 percent of total lending in the countries of the region.
According to the study, “Public Development Banks: Toward a New Paradigm?” these institutions have substantially improved their performance in recent years. In 2010 they achieved a return on equity of 14 percent, compared to a loss of 1 percent in 2000. Nevertheless, the study warns that there are public banks in the region with major structural problems, due to a lack of clarity in their mandate and corporate governance systems that prevent decision making that benefits the institutions.
In recent years the PDBs have succeeded in expanding their activities into new sectors such as renewable energy, climate change adaptation and mitigation, education, housing, microenterprises, innovation, and production chains.
With total assets equivalent to 25 percent of the region’s GDP in the region, including that of Brazil, the PDBs can provide valuable financial support for mitigating the effects of climate change, creating a favorable environment for needed investments and leveraging their own funding as well as financing from international sources, according to the study.
The study is the principal annual publication of the IDB’s Institutions for Development Department.