Bank Competition and Risk-Taking

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.