Why high productivity growth of banks preceded the financial crisis |
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| Affiliation: | 1. Universitat de les Illes Balears, Spain;2. Banco de España, Spain;3. Universidad de Zaragoza, Spain;1. Financial Stability Department, Bank of Canada, 234 Wellington Street, Ottawa, ON K1A 0G9, Canada;2. Canadian Economic Analysis Department, Bank of Canada, 234 Wellington Street, Ottawa, ON K1A 0G9, Canada;1. Independent, Florence 50122, Italy;2. Democritus University of Thrace, Department of Economics, Komotini, PC 69100, Greece;3. University of Zurich, Department of Banking and Finance, Germany;1. Department of Finance, Driehaus College of Business, DePaul University, 1 East Jackson Boulevard, Chicago, IL 60604, USA;2. Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, IL 60604, USA;3. Department of Economics, Driehaus College of Business, DePaul University, 1 East Jackson Boulevard, Chicago, IL 60604, USA;1. Dipartimento SEGESTA, Università Cattolica del Sacro Cuore, Via Necchi 5, 20123 Milano, Italy;2. Dipartimento Economia e finanza, Università Cattolica del Sacro Cuore, Via Necchi 5, 20123 Milano, Italy;3. Area Crediti, BCC Sesto San Giovanni, Viale Gramsci 202, Sesto San Giovanni, Italy |
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| Abstract: | The high levels of operating efficiency, profits, and market values for banks in the years before the financial crisis raise reasonable doubts about the accuracy of the assessments of the efficiency of banking intermediation. We examine the productivity growth in Spanish banks in the pre-crisis period by separating out the contributions to productivity growth from business practices and from industry-wide technological progress. We find that more than two thirds of the estimated productivity growth in the years 2000–2007 is attributed to banks’ practices, such as the expansion of credit in the housing market, the high recourse to securitization and short-term finance, the reduction in liquidity holdings, and the leveraging process of banks’ balance sheets, that the literature claims are the ultimate causes of the crisis. We estimate that the remaining cumulative annual growth rate is 2.8% for the industry’s technical progress, which is similar to that in the period of 1992–2000. |
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| Keywords: | Productivity of banks Financial stability Production function IT capital Simultaneity bias |
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