The relationship between politicization and the Spanish savings banks’ defaults

Abstract

IMPACT The authors show the extremely negative impact of having inexperienced directors with minimal or no knowledge of economics or finance serving on the boards of directors of Spanish savings banks. The failure of the savings banks would have bankrupted the Spanish banking sector and so the government had to invest public money to rescue it. Other public spending was therefore drastically reduced. The authors call for banks to be depoliticized and for their supervisory systems to be strengthened to guarantee their solvency in the long term. ABSTRACT The heavy politicization of the corporate governance of the Spanish savings banks is shown in this paper to be a key factor explaining a large number of defaults. The authors explain the effect of political influence on savings banks boards of directors and provide empirical evidence about the factors that led to both poor performance and failures. The authors found a negative association between the percentage of savings banks’ board members appointed by politicians and performance. The demise of savings banks was important in terms of the public sector finances because the Spanish government had to spend millions of euros to rescue the banking system, with consequent cuts in government spending in other areas.