Bank concentration and the interest rate spread in Peru

This article examines the impact of banking concentration (BC) on the interest rate spread in the Peruvian banking system between 1995 and 2004, using an unbalanced linear panel data model and addressing autocorrelation issues. It is based on the Structure-Conduct-Outcome (SCO) paradigm, which posits that greater concentration should result in higher interest rates. Quarterly data from 29 banks were used, analyzing both the domestic and foreign currencies. The results indicate that market concentration, measured by the Concentration Index of the three largest banks (IC3), has a positive and statistically significant effect on the interest rate spread, evident primarily in foreign currency. However, the magnitude of the effect is modest, with an increase of approximately 0.03 percentage points in the spread for every percentage point increase in concentration. The implications suggest that it is essential to promote banking competition to mitigate the impact of concentration on interest margins, and to highlight the importance of factors such as non-performing loans and administrative costs in the dynamics of the system. (Abstract and audio: Department of Economic Publications)