Financial integration and structural changes in Spanish banks during the pre-crisis period

Artículo de revist

I.T. investment and intangibles : evidence from banks

This paper models the investment behaviour of a multi-asset firm with market power that accumulates valuable intangible assets to complement the IT capital. The investment model is estimated using data from Spanish banks on assets of different nature: material (branches, financial), immaterial (advertising and IT) and intangible (training of workers). The paper estimates that the representative bank spends five additional Euros per Euro invested in IT-related assets in complementary intangible assets or, equivalently, intangibles amount to approximately 10% of the economic value of the representative bank. The remaining economic value is distributed between 28% from rents attributed to market power, and 62% to the cost of market-purchased asset

The output and profit contribution of information technology and advertising investments in banks

This paper examines the contribution of investments in Information Technology (IT) and in advertising to the output and profits of Spanish banks, in the period 1983-2003. We find that the growth in the stock of IT capital explains one third of output growth of banks, and that an additional investment in IT of one million euros may be substituted for twenty-five workers. The paper also finds that advertising investments increase the demand for bank services with an elasticity of 0.22 for deposits and 0.11 for loans. For all the assets considered, the null hypothesis that banks use the profit-maximizing amount of services per period cannot be rejected with the dat

How do intangible assets create economic value? : an application to banks

This paper examines the determinants of economic value and investment behavior of Spanish banks under the theory of investment for a multi-asset firm, focusing on three key issues: i) the distinction between immaterial and intangible assets and how each of them is related to the economic value of the firmii) the test of whether the accumulation of intangibles is a consequence of incurring adjustment costs or, on the contrary, intangibles are accumulated at no cost, and iii) how to account for market power in the valuation of the multi-assets firm. The empirical results quantify the contribution of material, immaterial (information technology and advertising) and intangible (organization capital) assets to economic value of Spanish banks, separated from the contribution of market power. We find that intangible assets build up from adjustment costs of investments in IT and rents from market power split evenly the economic value of the bank above the replacement cost of material and immaterial asset

How does bank competition affect credit risk? Evidence from loan-level data

This paper studies how loan credit risk depends on competition in the banking sector. We estimate an empirical model of credit risk using data from the Spanish Credit Register on individual loans to non-financial firms in 1992–2007. Our results show that credit risk decreases with the level of competition in the credit market, and they are consistent with the prediction from the moral hazard view on the determinants of credit risk. We also find that the probability of loan default varies with characteristics of the bank, the local market and macro variables

Securitization and banks’ capital structure

La titulización de activos ofrece a los bancos la posibilidad de alterar su estructura de capital y el proceso de intermediación financiera. Este trabajo muestra que la introducción de la titulización está asociada con cambios fundamentales en la política de captación de fondos de los bancos. En particular, presentamos evidencia de un uso más intenso de la titulización por parte de los bancos i) con mayores oportunidades de crecimiento, ii) con restricciones de liquidez, iii) con alternativas más costosas de financiación, y iv) con restricciones de acceso al mercado de capital debido a la selección adversa. Se observa también en este trabajo que la titulización ocupa un lugar importante en el orden de prelación en la elección de fuentes de financiación de los bancos medianos y pequeños y de los no cotizados, que son los que probablemente tienen problemas de selección adversa más severosAsset securitization offers banks the possibility of altering their capital structures and the financial intermediation process. This study shows that the introduction of securitization is associated with fundamental changes in the funding policies of banks. In particular, we present evidence of more intense use of securitization by banks (i) with stronger growth opportunities(ii) with liquidity constraints(iii) with costlier alternative sources of fundingand (iv) with restricted access to capital markets owing to adverse selection. Securitization is also observed to be higher on the pecking order of financing choices of small and medium-sized banks and non-listed banks, which are likely to face more severe adverse selection problem

Productivity, competition and bank restructuring process

This paper analyzes how differences in productivity across banks and the evolution of industry productivity over time might determine the intermediation costs and the restructuring process of the banking industry in the Great Recession. With data of Spanish banks, we find that less productive banks are more likely to exit than more productive banks, and that surviving banks acquire target banks in order to expand their branch network in local markets where they are underrepresented. Competition among banks contributes to the translation of industry productivity growth into lower interest rates of loans. Nonetheless, we find that the industry profit margin in loans increases during the period because of the modest industry productivity growth and the lower intensity of competition from branch closing

Effects of equity capital on the interest rate and the demand for credit : empirical evidence from Spanish banks

We examine the consequences of imposing higher capital requirements on banks (as under Basel III or, recently, in the case of large banks in the European context) for bank dynamics in complying with the new standards and for the long-term effects on bank lending rates and the demand for bank credit. The analysis combines econometric estimations of the determinants of equity capital ratios and lending rates with simulations of market equilibrium results for loan interest rates and the demand for bank credit, based on a parameterised model of the Spanish banking industry. We find that the gap between the target and the actual capital ratio is reduced by around 40% every year, mainly with retained earnings. We also find that raising the equity capital ratio by one percentage point increases bank lending rates by 4.2 basis points. Finally, the simulation exercise shows that the estimated increase in the cost of funds for banks associated with a one percentage point increase in the equity capital ratio leads to a fall of 0.8% in the total demand for bank credit. These results suggest that the social costs of higher equity capital requirements for banks are expected to be greater in the transition period, when banks are adjusting to the new standards, than in the steady state of the new industry equilibrium, when all banks comply with the new ratioEste trabajo analiza las consecuencias de un aumento de los requerimientos de capital a los bancos (tal como en Basilea III o en la nueva normativa europea dirigida a los grandes bancos) tanto en el corto plazo, esto es, en la dinámica del ajuste de los bancos para cumplir con los nuevos estándares, como en el largo plazo. El análisis combina las estimaciones econométricas basadas en modelos sobre los determinantes de los ratios de capital y de los tipos de interés del crédito bancario con mediciones del impacto en el equilibrio a largo plazo en los tipos de interés y en la demanda de crédito bancario, obtenidas a partir de simulaciones basadas en las estimaciones de un modelo paramétrico para el sector bancario español. Los resultados indican que la brecha entre los ratios de capital actuales respecto a los nuevos requerimientos se cerrará con un reducción progresiva del 40% anual, principalmente mediante la retención de beneficios. Adicionalmente, el trabajo permite concluir que un aumento de un punto porcentual del ratio de capital se traduce en un aumento de 4.2 puntos básicos en los tipos de interés de los préstamos bancario

Why did high productivity growth of banks preced the financial crisis?

The observed high levels of banks’ operating effi ciency, profi ts and market values in the years before the fi nancial crisis raise reasonable doubts about the information content of conventional performance measures for the accurate assessment of the effi ciency of banking intermediation. In this paper we estimate the productivity of individual Spanish banks and the industry’s productivity growth over time using the methodology of Olley and Pakes (1996) and Levinsohn and Petrin (2003), which controls for simultaneity bias. We then examine the contributions of two sets of factors to productivity growth: banking practices that have been signalled as the proximate causes of the crisis, and technical progress in the industry. We obtain that more than two thirds of the estimated productivity growth in the years 2000-2007 is attributable to practices such as the expansion of the housing market, the high recourse to securitization and short-term fi nance, and the leveraging of banks’ balance sheets. The remaining 2.8% cumulative annual growth rate is our estimate for the technical progress in the industry, similar to the estimated rate in the period 1993-2000Los elevados niveles de efi ciencia operativa, benefi cios y valoración que experimentaron los bancos en los años previos a la crisis suscitan dudas razonables sobre el contenido informativo de las medidas de desempeño convencionales en su uso para la evaluación de la efi ciencia en la intermediación bancaria. Este trabajo estima la productividad de los bancos españoles a nivel individual, basándose en la metodología de Olley e Pakes (1996) y Levinsohn y Petrin (2003), para corregir por el sesgo de simultaneidad. A partir de esta, estima el crecimiento de la productividad agregada en el sector bancario español. Asimismo, el trabajo analiza las contribuciones al crecimiento de la productividad de dos tipos de factores: las prácticas bancarias que han sido señaladas como causas directas de la crisis y el progreso técnico en el sector. Los resultados muestran que dos terceras partes del crecimiento estimado de la productividad en el período 2000-2007 son atribuibles a cambios en las prácticas bancarias, tales como: la expansión del mercado de la vivienda, el elevado recurso a la titulización de activos y a la fi nanciación a corto plazo, así como el proceso de apalancamiento en los balances bancarios. El restante 2,8 % se interpreta como el progreso técnico estimado para el sector en el período analizado, similar al estimado para el período 1993-200

A test of the law of one price in retail banking

This paper investigates the level and determinants of retail banking interest rate differences among Spanish banks in the period 1989 2003. We find that interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Different credit risk across banks and loan products is an important source of interest rate dispersion in the short and long run that puts limits to banking integration