Research

We estimate the effects of bank competition on economic development relying on a merger episode that involved the two largest banks competing over small firms in Peru. By exploiting differences in the banks’ geographical footprint, we measure how the merger changed the degree of competition in local banking markets, and how it affected credit, economic activity, and the allocation of resources across firms. We find an aggregate decline in credit, labor, capital, and sales of small firms after the merger. Moreover, we find that low bank competition discourages entry decisions, favoring incumbent firms over potential entrants, and reducing business dynamism. The decline in bank competition has substantial distributional effects. The contraction of capital is concentrated among small firms with high marginal returns, which increases capital misallocation. In equilibrium, large firms expand by taking over the market share previously attended by small firms, leading to higher levels of concentration in the real economy.

We estimate the financial and real effects of a lending rate cap introduced in Peru, affecting 26 percent of small business loans. Leveraging variation in exposure to the policy across loans, banks, and local credit markets, we find that the program reduces interest rates and small-size credit supply. However, in equilibrium, highly exposed banks expand bigger loans, keeping their market share constant despite a 23 percent decline in interest rates. Moreover, highly treated banks replace risky borrowers with safe and new firms within concentrated local credit markets, which leads to a net positive effect on credit and real outcomes. In contrast, the effect is negative in more competitive locations as banks cannot replace risky firms. Finally, we document that small entrepreneurs with higher returns to capital accumulate more of this input and grow faster after the policy, while small businesses with low returns to capital shrink, providing novel evidence that lending rate caps can reduce capital misallocation in concentrated credit markets.

We quantify the role of microfinance institutions (MFIs) in shaping the allocation and aggregate impact of financial stimulus policies in emerging markets. To do so, we study a huge program of loan guarantees implemented in Peru during the last recession and estimate the response of small businesses. We find that the program expanded credit supply and improved small firm performance with substantial heterogeneous effects. A 10 percent increase in credit supply led to a 5 percentage points decline in delinquency rates among smaller firms, and only 1 percentage point among bigger borrowers. While MFIs distributed 50 percent of their guarantees to smaller borrowers, traditional banks distributed only 20 percent of their guarantees to these firms. We build a stylized model where MFIs and traditional banks face poaching threats and attend heterogeneous firms. Our calibrated model indicates that, by orienting the allocation of guarantees towards smaller borrowers, MFIs reduced the aggregate share of non-performing loans in 30 percent relative to a counterfactual scenario where only traditional banks distribute guarantees.