Research

We estimate the financial and real effects of a lending rate cap introduced in Peru, affecting 26 percent of small business loans. Using 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 but increased it in competitive ones.

We study whether and how domestic banking regulations propagate internationally through trade linkages. We develop a stylized framework in which exporters respond to a credit-driven contraction in import demand through two margins: attenuating the shock by extending trade credit to constrained importers and reallocating exports across destinations. We test these mechanisms exploiting a large and unexpected increase in loan-loss provisioning requirements imposed on Spanish banks in 2012. Combining bank–firm credit registry data, confidential firm-level trade transactions, and global bilateral trade flows, we show that the regulation reduced credit supply to importers and led to a contraction in Spanish imports, generating spillovers to trading partners. Consistent with the model, exporters in financially developed economies—which are better positioned to extend trade credit—offset the shock, while exporters in less developed financial systems experienced larger declines, particularly when trade costs are high. Exporters of homogeneous products reallocate across markets, whereas differentiated products exhibit limited reallocation and larger export declines.

We study how microfinance institutions (MFIs) shape the allocation and aggregate impact of financial stimulus during recessions. We develop a stylized model showing that private lenders may deviate from the social optimum, prioritizing inframarginal clients when poaching threats are strong. This distortion is amplified when lenders are specialized in such clients. We then exploit a large-scale loan guarantee program for small firms implemented in Peru during the COVID-19 recession, combined with administrative data covering the universe of small business loans. We show that guarantees significantly reduced delinquency rates, particularly among micro-firms and those in high-contact industries, segments facing severe liquidity needs. MFIs channeled a larger share of guarantees to these high-sensitivity segments, while traditional banks prioritized inframarginal firms, consistent with our model. We extend our framework to incorporate lender specialization and heterogeneous firms and calibrate it to the data. The model shows that the program reduced defaulting debt by 30 percent relative to a counterfactual where only traditional banks distributed guarantees. Our core insight that MFI specialization shapes the aggregate impact of financial stimulus remains robust across settings where MFIs face higher distribution costs, serve riskier clients, or have weaker monitoring incentives.

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.