Research

We document a novel channel through which domestic bank regulations generate cross-border real effects via international trade. Our setting is a one-time, unexpected increase in loan loss provisions in Spain in 2012. Using comprehensive administrative data from the Spanish credit register matched with customs data, we show that importers relying on the most affected banks experienced sharp reductions in credit supply, which led to a decline in their purchases abroad. Leveraging bilateral trade data at the country-product level, we find that Spanish aggregate imports declined, indicating limited reallocation across firms: the shock on highly exposed importers was not offset by the expansion from less exposed ones. This decline in Spain's import demand is transmitted internationally, as total exports of Spain's trading partners fell. The effect was stronger for countries with less developed financial systems, for exporters facing higher bilateral trade costs vis-á-vis Spain, and for products that are harder to reallocate across markets. Our findings highlight international trade as a key transmission mechanism of banking regulation--and domestic shocks more broadly--with implications for the cross-border coordination of prudential policy.

We estimate the financial and real effects of a lending rate cap introduced in Peru, affecting 26 percent of small business loans. Leveraging variation in exposure to the policy across loans, banks, and local credit markets, we find that the program reduced interest rates and generated substantial credit reallocation. In concentrated markets, highly treated banks replace risky borrowers with safe and new firms, which led to a net positive effect on credit and real outcomes. In contrast, the effect is negative in competitive locations where banks could not replace risky firms. This credit reallocation allowed highly treated banks to maintain their market share constant despite a 23 percentage-points decline in interest rates. Finally, we show that excluded risky borrowers had lower marginal revenue productivity of capital than the firms who obtained more credit at lower rates. Consequently, the lending rate cap reduced capital misallocation in concentrated markets.

This paper estimates the effect of a small business loan guarantee program on firm performance and examines the role of Microfinance Institutions (MFIs) in shaping its allocation and aggregate effectiveness. We analyze a large-scale program implemented in Peru during the COVID-19 recession. Using administrative data covering the universe of small business loans, we document that the program improved small firm performance by alleviating liquidity needs among micro-firms in high-contact industries. MFIs distribute more guarantees toward this high-sensitive segment and, conditional on firm size and industry, MFIs' clients are more responsive to the program. We develop a model with heterogeneous lenders and firms to rationalize our findings. Our model shows that MFIs' participation reduced defaulting debt by 30 percent more than in a counterfactual where only traditional banks distributed guarantees. However, over-reliance on MFIs can diminish program effectiveness due to the inclusion of riskier borrowers.

We estimate the effects of bank competition on economic development 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, economic activity, and the allocation of resources across firms. We find an aggregate decline in credit, labor, capital, and sales of small firms after the merger. Moreover, we find that low bank competition discourages entry decisions, favoring incumbent firms over potential entrants, and reducing business dynamism. The decline in bank competition has substantial distributional effects. The contraction of capital is concentrated among small firms with high marginal returns, which increases capital misallocation. In equilibrium, large firms expand by taking over the market share previously attended by small firms, leading to higher levels of concentration in the real economy.