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Bank Competition and Risk-Taking

Author

Listed:
  • Pozo, Jorge
  • Rojas, Youel

    (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.

Suggested Citation

  • Pozo, Jorge & Rojas, Youel, 2021. "Bank Competition and Risk-Taking," Working Papers 2021-007, Banco Central de Reserva del Perú.
    • Handle: RePEc:rbp:wpaper:2021-007
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    More about this item

    Keywords

    Competition; bank risk-taking; financial stability.;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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