Deregulation and Productivity: The Case of Spanish Banks

This paper deals with measuring total factor productivity (TFP) growth of financial institutions incorporating different types of deregulatory measures. TFP growth is decomposed into external, scale, and markup (in output prices) components. The contribution of the external component is further dissected into several types of deregulation and technical change components. We include the TFP growth relationship as an additional equation in estimating the cost system. The empirical model uses panel data on Spanish banks (savings and commercial), primarily because the Spanish banking sector went through rapid deregulatory changes. We find that deregulations, in general, contributed positively to TFP growth for both savings and commercial banks. Furthermore, domestic (European) deregulations had a greater effect on TFP growth of savings (commercial) banks.Total factor productivity, markup, deregulation, and technical change.

Is foreign-bank efficiency in financial centers driven by home-country characteristics?

This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg’s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.

Branching Deregulation and Merger Optimality

The U.S. banking industry has been characterized by intense merger activity in the absence of economies of scale and scope. We claim that the loosening of geographic constraints on U.S. banks is responsible for this consolidation process, irrespective of value-maximizing motives. We demonstrate this by putting forward a theoretical model of banking competition and studying banks’ strategic responses to geographic deregulation. We show that even in the absence of economies of scale and scope, bank mergers represent an optimal response. Also, we show that the consolidation process is characterized by merger waves and that some equilibrium mergers are not profitable per se -they yield losses- but become profitable as the waves of mergers unfold.Banking Competition, Deregulation, Mergers

Whom to Merge with? A Tale of the Spanish Banking Deregulation Process

We put forward a simple spatial competition model to study banks’ strategic responses to the Spanish asymmetric geographic deregulation. We find that once geographic deregulation process finishes, inter-regional mergers between the savings banks are optimal. We claim that the public good nature of the merging activities together with the incentives provided by the deregulation process are the driving factors behind the equilibrium merger of the savings banks. It seems that the economic crisis will finally force regional politicians to allow inter-regional caja mergers, letting the consequences of the removal of geographic barriers in the 80’s come to a fruition with a delay of thirty years.Banking Competition, Deregulation, Mergers

A flexible cost function model with risk

In examining bank cost efficiency in banking inclusion of risk-taking of banks is very important. In this paper we depart from the standard modeling approach and view risk intimately related to the technology. Thus, instead of controlling for risk by viewing them as covariates in the standard cost function we argue that the technology differs with risk, thereby meaning that the parameters of the parametric cost function changes with risk in a fully flexible manner. This is accomplished by viewing the parameters of the cost function as nonparametric functions of risk. We also control for country-specific effects in a fully flexible manner by using them as arguments of the nonparametric functions along with the risk variable. The resulting cost function then becomes semiparametric. The standard parametric model becomes a special case of our semiparametric model. We use the above modeling approach for banks in the EU countries. Actually, European financial integration is seen as a stepping stone for the development of a competitive single EU market that promotes efficiency and increases consumer welfare, changing the risk profile of the European banks. Particularly, financial integration allows more risk diversification and permits banks to use more advanced risk management instruments and systems, however it has at the same time increased the probability of systematic risks. Financial integration has increased the risk of contagion and changed its nature and scope. Consequently the bank’s risk seems to be an important issue to be investigated

Efficiency of European banking systems: A correction by environment variables

In this paper we extend the efficiency cross-country comparisons to ten European countries in order to know how different or similar current banking performances are. We start with two types of comparisons. First of all, we evaluate the average technical efficiency of each country by means of a DEA model called "basic" model. This model includes only banking variables. Our second model, called "complete", does consider environmental variables together with the banking variables of the basic model. The empirical results recommended us to substitute the original environmental variables with new codified variables. Finally, the non homogeneity of the country-samples, observed after performing an individual DEA analysis for each country, was decisive for considering two new models, based on a modified sample. The comparisons between the last two models show that the country specific environmental conditions exercise a strong influence over the average efficiency score of each country. El objetivo de este trabajo es comparar la eficiencia de diez países europeos. Para ello, el trabajo comienza con dos tipos de modelos. El primero analiza la eficiencia técnica media de cada país por medio de un modelo DEA que denominamos “modelo básico” y que incluye sólo variables bancarias. El segundo, llamado “modelo completo” incluye variables ambientales junto con las variables bancarias del modelo básico. Los resultados obtenidos en este segundo modelo recomendaron sustituir las variables ambientales originales por unas nuevas variables codificadas. Finalmente, la heterogeneidad de las muestras por países, observada después de realizar un análisis individual por país, lleva a considerar dos nuevos modelos, basados ambos en el modelo codificado. Las comparaciones entre estos dos modelos muestran que las condiciones ambientales de cada país ejercen una influencia muy fuerte en la eficiencia media de cada país.Eficiencia, DEA, condiciones ambientales, banca europea Efficiency, DEA, environmental conditions, European banking

Is foreign-bank efficiency in financial centers driven by homecountry characteristics?

This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg?s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.Foreign bank efficiency, Home-host country characteristics, Bank regulation, Data Envelopment Analysis, Bootstrap

The Effects of Deregulation on the Performance of Financial Institutions: The Case of Spanish Savings Banks

This paper examines the impact of regulatory reform on the performance of Spanish savings banks. To this end it uses panel data for the period 1986-1995 and a flexible variable profit function that incorporates time-varying technical efficiency. The focus is whether increased competition brought on by deregulation affected performance of banks over time. Bank performance, measured by the percentage change in profitability, ceteris paribus, is decomposed into technical change and change in technical efficiency both of which are defined in terms of the profit function. We also examine output technical efficiency, which is defined in terms of the production possibility frontier. Several alternative models with different specifications of technical efficiency are used to check robustness of the results. Empirical results show declining levels of output technical efficiency along with a significantly high rate of technical progress. In spite of declining technical efficiency during this period, we find evidence of an increasing trend in productivity growth