Bank Competition and Risk-Taking

Jorge Pozo and Youel Rojas

No 2021-007, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper studies empirically the relationship between competition in the loan market and risk-taking in the Peruvian financial system. Our finding challenges the theoretical work of Martinez-Miera and Repullo (2010) that finds a U-shaped relationship between competition and risk-taking, as well as the empirical work of Jiménez et al. (2013) that finds evidence that supports this nonlinear relationship in a developed economy as Spain. In contrast, we find empirical evidence of an inverted U-shaped relationship between competition and risk-taking in Peru, an emerging economy. We develop a theoretical model to rationalize our empirical findings. One possible explanation for our findings is the greater presence of borrowing constraints faced by entrepreneurs, which is a common feature in emerging economies.

Keywords: Competition; bank risk-taking; financial stability. (search for similar items in EconPapers)
JEL-codes: E44 G21 L11 (search for similar items in EconPapers)
Date: 2021-12
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Persistent link: https://EconPapers.repec.org/RePEc:rbp:wpaper:2021-007

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