Essays on Finance and Development

Abstract

This thesis consists of three chapters on finance and development. In the first chapter, co-authored with Nikita Céspedes and Rafael Nivin, we estimate the effects of bank competition on credit and financial stability 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 supply. We document a reduction in credit after the merger, mainly in municipalities that registered a higher increase in bank concentration. We also find an increase in the share of non-performing loans, suggesting that low levels of competition in the banking sector can also reduce financial stability. In the second chapter, I study the real effects of bank competition relying on the merger episode described above. I find an aggregate decline in labor, capital, and sales of small firms after the merger. I also document that low bank competition discourages entry decisions, reducing business dynamism. The decline in bank competition has important distributional effects. The contraction of capital is concentrated among small firms with high returns. Large firms expand, increasing concentration in the real economy. In the third chapter, I investigate the effects of lending rate caps on small firms loans. I study a regulation that prohibited interest rates above 83.4\% in Peru, affecting 27\% of loans to small firms. I define treatment at the city level as the percent decline necessary to bring interest rates on all loans issued before the reform down to the lending rate cap. I find that one standard deviation higher treatment is associated with a 5 percentage points decline in interest rates with null effects on total loans. This is because banks can reallocate credit away from risky borrowers towards new clients within local credit markets that are highly concentrated. This reallocation of credit reduces the share of non-performing loans and strengthens financial stability, suggesting a minor role for the risk-taking channel associated with the deterioration of banks charter value when interest rates are regulated.