Spanish Banking System Research Articles

Classification of the risk in the new financing framework of the Deposit Guarantee Systems in Europe: K-Means Cluster Analysis and Soft Computing

The guidelines published by the European Banking Authority in 2015 about the contributions to the Deposit Guarantee Systems, establish two approaches to classify the member entities’ risk: the bucket method and the sliding scale method, allowing freedom to every Member State to decide which methodology to use. In this work, using the bucket method with two different clustering techniques, k-means and soft computing, in a sample that represents more than 90% of the deposits covered in the Spanish banking system during the 2008 to 2014 period, the differences in the distribution of the Deposit Guarantee Fund risk and in the entities’ contributions is analyzed. The obtained results reveal important differences. Consequently, the technique chosen by each country will determine the contributions regime.

Spanish mortgage crisis and accumulation of foreclosed housing by SAREB: a geographical approach

ABSTRACTSAREB (Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria – Company for the Management of Assets proceeding from the Restructuring of the Banking System) has played a key role in the process of restructuring the Spanish banking system and managing the property assets of the banks since the bursting of the housing bubble. This company has concentrated the housing stock that the rescued banks had accumulated through foreclosures. As a result, the identification of the territorial patterns of its assets is key to understanding the spatial logics of the housing crisis in Spain. There are no publicly available data about the location of the housing stock in the hands of SAREB. For this reason, the study explores an alternative secondary source. The resulting map allowed the researchers to check the utility of this source and to carry out calculations of spatial correlation using indicators relating to the impact of the property boom in different municipalities. This made it possible to spatially correlate exposure to the hyperproduction of housing and the concentration of housing in the hands of SAREB as a result of mortgage foreclosures and to open a route towards a novel geographical reading of Spain's mortgage crisis.

A note on the adequacy of the EU scheme for bank recovery, resolution and deposit insurance in Spain

This article analyzes whether the funds set by the recent EU directives on bank resolution and deposit insurance to create a safer and sounder financial sector (that is, 1 and 0.8 per cent of covered deposits, respectively) are adequate to cover unexpected losses for the Spanish banking system. By applying a framework based on the foundation internal ratings-based approach established in Basel Capital Accords, we find that the fixed target levels proposed by the EU bank rules would not ensure the highest credit quality for a bank resolution and deposit insurance Fund in Spain. Nevertheless, these resources would be sufficient to ensure a good solvency level for the Fund, equivalent to an AA S&P rating in 2013.

Sovereign debt and bank fragility in Spain

In May 2012 the Spanish government announced a debt-financed recapitalization of the undercapitalized Spanish banking system. Although there was a wide consensus among economists and policymakers that this was key to solving Spain’s economic troubles, both bank CDS and sovereign CDS further increased in the days following the announcement while lower bank CDS spreads were expected. Higher sovereign debt discounts deteriorated the fiscal position of the Spanish government. We propose a mechanism that can explain the events in Spain, namely the interaction whereby weak banks that are heavily exposed to risky domestic sovereign debt and weak government finances set off a negative amplification cycle: additional debt issue leads to higher sovereign debt discounts, resulting in capital losses on existing sovereign debt, deteriorating the capital base of banks, additional rounds of interest rate increases, a perverse amplification cycle substantially offsetting the initial recapitalization. We construct a DSGE model with balance-sheet-constrained financial intermediaries that finance private loans to the real economy, as well as sovereign debt subject to sovereign default risk. We calibrate the model to Spanish data, and find that our model is capable of matching the developments in the sovereign bond market in Spain in May/June 2012 quite well. We investigate an alternative policy, direct recapitalization by a foreign entity, such as the ESM, which avoids the negative sovereign risk amplification cycle.

New rules for calculating contributions to deposit guarantee schemes in Europe: an application to the Spanish banking system

ABSTRACTThis paper analyses the effects on the Spanish banking system of the new rules for calculating bank contributions to deposit guarantee schemes (DGSs) established by the European Directive dated 16 April 2014. Our sample represents over 90% of the covered deposits in Spain during the period from 2008 to 2014. We follow the guidelines published by the European Banking Authority in 2015, which propose two different methods for calculating risk weights: the bucket method and the sliding scale method. We find that most banks would increase their contributions to DGSs under the new system based on risk-adjusted contributions, indicating a cross-subsidy in the flat-rate system from lower-risk credit institutions to higher-risk institutions. Moreover, we report that the bucket method would provide stronger incentives for banks to engage in prudent risk management. Finally, we conclude that the new system could reduce the moral hazard often associated with larger banks.

Distribution of cost inefficiency in stochastic frontier approach: evidence from Spanish banking

ABSTRACTThe aim of the paper is to demonstrate the appropriateness of an a priori analysis to determine the distributional assumption of the inefficiency term in a stochastic frontier model. To this end, theoretical distributions of estimated inefficiency were obtained when the inefficiency term is assumed to be distributed as a half normal and an exponential in a cost frontier model. Comparisons of such theoretical distributions with the respective cost inefficiency estimators using the goodness of fit test allow selecting the most appropriate distributional assumption. The application on three data sets of Spanish banking system in 2009 demonstrated the relevance of the research question. First, the results of estimated cost inefficiency with a half normal assumption are larger than with an exponential distribution significantly. Besides, half normal assumption was rejected and exponential was not rejected as the most appropriate distribution of inefficiency term in Spanish banking data set. However, the adjustment of saving banks data had been better with the former distribution than the latter. In the case of banks, any distribution results appropriate. To sum up, this work demonstrate that the distributional assumption on inefficiency term in Stochastic Frontier Approach must be established in a justified way, as it can significantly bias the results of estimated inefficiency and therefore, influences improving policies and strategies in the Spanish banking sector.

A New Methodology for Calculating Contributions to Deposit Guarantee Schemes in Europe: An Application to the Spanish Banking System

This paper analyzes the effects on the Spanish banking system of the new rules for calculating bank contributions to deposit guarantee schemes (DGSs) established by the European Directive dated 16 April 2014. Our sample represents over 90% of the covered deposits in Spain during the period from 2008 to 2014. We follow the guidelines published by the European Banking Authority in 2015, which propose two different methods for calculating risk weights: the bucket method and the sliding scale method. We find that most banks would increase their contributions to DGSs under the new system based on risk-adjusted contributions, indicating a cross-subsidy in the flat-rate system from lower-risk credit institutions to higher-risk institutions. Moreover, we report that the bucket method would provide stronger incentives for banks to engage in prudent risk management. Finally, we conclude that the new system could reduce the moral hazard often associated with larger banks.

The Countercyclical Capital Buffer in Spain: An Analysis of Key Guiding Indicators

This paper analyses a group of quantitative indicators to guide the Basel III countercyclical capital buffer (CCB) in Spain. Using data covering three stress events in the Spanish banking system since the early 1960s, we describe a number of conceptual and practical issues that may arise with the Basel benchmark buffer guide (i.e. the credit-to-GDP gap) and study alternative specifications plus a number of complementary indicators. In this connection, we explore ways to deal with structural changes that may lead to some shortcomings in the indicators. Overall, we find that indicators of credit ‘intensity’ (where we propose the ratio of changes in credit to GDP), private sector debt sustainability, real estate prices and external imbalances can usefully complement the credit-to-GDP gap when taking CCB decisions in Spain.

Assessing the Adequacy of the EU Scheme for Bank Recovery, Resolution and Deposit Insurance in Spain

This paper analyzes whether the funds set by the recent EU directives on bank resolution and deposit insurance to create a safer and sounder financial sector (i.e., 1% and 0.8% of covered deposits, respectively) are adequate to cover unexpected losses for the Spanish banking system. By applying a framework based on the foundation internal ratings-based (FIRB) approach established in Basel Capital Accords, we find that the fixed target levels proposed by the EU bank rules would not ensure the highest credit quality for a resolution and deposit insurance Fund (BRDIF) in Spain. Nevertheless, these resources would be sufficient to ensure a good solvency level for the Fund, equivalent to an AA S&P rating in 2013.

Efficiency in Spanish banking: A multistakeholder approach analysis

Searching for greater inter efficiency has been used as a reason to modify the Spanish banking system since 2009. This paper aims to contribute to quantify the magnitude of efficiency, but not only the economic one, but also social and overall efficiency from 2000 to 2011. The case of Spain – compared to other banking systems – provides unique information regarding the stakeholder governance banking literature because over the last century savings banks have become rooted in the Spanish culture. The results – confirmed by a two-stage frontiers analysis, a DEA and a model combined with bootstrapped tests – indicate that Spanish savings banks are not less efficient globally than banks and are more efficient socially. Moreover, our results – with potentially important implications – encourage the participation of stakeholders in banking systems and underline the importance of attaining long-term efficiency gains to support financial stability objectives.

Top executive pay in Spanish banking system

AbstractThis study examines consistency between compensation systems and corporate performance. The main purpose is to analyse how the performance has affected the short-term executive pay in Spanish banking system during the period 2004–2008. The main results reveal that pay-performance sensitivity is asymmetrical regarding the sign of the variation of the performance, since the pay-performance sensitivity is greater when the variation of the results is positive than when the variation of the results is negative. This finding is consistent with the managerial power theory and calls into question the role of the pay-performance incentives to align interest of executives and shareholders.

Debt Crisis and Fiscal Consolidation in Spain**

This paper analyses the start of the debt crisis in Europe and in Spain, which increased inflation, unemployment and public debt. Although Spanish banking system was considered one of the best, the growing debt brought Spain into one of the worst affected countries in financial crisis. Because of this, Spain was faced to the fiscal consolidation as the imperative for further development. The strength of the crisis in Spain can be seen from main economic indicators. Budget deficit in Spain was almost 12% just two years after it went into surplus for the first time in 30 year period. Public debt has started to rise from 2007 and in 2013 it overcomes 90% of GDP. The rate of unemployment also started to rise from 2007 and in 2013 it is higher than 25%. This paper analyses also Phillips curve in Spain using the actual data after the start of fiscal consolidation.

Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency

This paper studies the impact of the subprime crisis on the ratings issued by the rating agencies in evaluating the solvency of banks. After ascertaining a significant worsening of ratings after the crisis, the paper hypothesises the possibility that this worsening is due not exclusively to a deterioration in the banks’ credit quality, but also to a change in the behaviour of the rating agencies. The study designs a methodology to separate the observed change in ratings into two multiplicative components: one associated with the deterioration of the banks’ solvency itself and another associated with the change in the agencies’ valuation criteria. The methodology is applied to the Spanish Banking System during the period 2000–2009. The results obtained show that the observed lowering of ratings (10.88%) is explained (75%) by the deterioration in the solvency of the banks, but also (25%) by the hardening of the valuation criteria adopted by the agencies. This shows the procyclical character of ratings.

The productivity of the Spanish banking system in the ’80s: international comparison

In this paper the authors set out to determine whether the present Spanish banking system is as inefficient as previous studies have indicated. In order to achieve this aim they use a methodology similar to that of other researchers who have completed industry studies. They also discuss the evolution of the Spanish banking system during the 1980s.

Le système bancaire espagnol : du mirage au désastre

L’enorme choc qu’a subi le systeme bancaire espagnol dans la periode recente ne peut se comprendre sans un bref retour historique sur les facteurs qui l’ont faconne au cours du xxe siecle. Le contexte post-guerre civile, les politiques economiques sous le franquisme, puis la phase de liberalisation et la transition a la democratie permettent de comprendre l’etat du systeme bancaire a l’aube de la crise de 2008. L’evolution de la reglementation a egalement joue un role essentiel dans les strategies de developpement et la gouvernance des entites financieres espagnoles. Enfin, la phase de croissance au cours de la premiere decennie du siecle, artificiellement entretenue par une bulle immobiliere, explique l’ampleur du desastre qui a suivi son eclatement. En pleine restructuration, les nouvelles perspectives du systeme bancaire apparaissent encore peu lisibles. Classification JEL : G01, G21, G28.

How does competition affect bank risk-taking?

A common assumption in the academic literature and in the supervision of banking systems is that franchise value plays a key role in limiting bank risk-taking. As market power is the primary source of franchise value, reduced competition in banking markets has been seen as promoting banking stability. A recent paper by Martínez-Miera and Repullo (MMR, 2010) shows that a nonlinear relationship theoretically exists between bank competition and risk-taking in the loan market. We test this hypothesis using data from the Spanish banking system. After controlling for macroeconomic conditions and bank characteristics, we find support for this nonlinear relationship using standard measures of market concentration in both the loan and deposit markets. When direct measures of market power, such as Lerner indices, are used, the empirical results are more supportive of the original franchise value hypothesis, but only in the loan market. Overall, the results highlight the empirical relevance of the MMR model, even though further analysis across other banking markets is needed.

‘Beggars Can’t Be Choosers’: Spain and the Financial Crisis

AbstractThis contribution analyses the viability of the new Spanish financial landscape which has been drawn by the European authorities and the national administration in order to overcome the progressive deterioration of social wealth in Spain since the beginning of the economic crisis in 2008.The adoption and the implementation of a new legal framework during the last two years, establishing tougher requirements on capital adequacy, leverage ratios and counter-cyclical and other buffers, as well as the shaping of the Banking Union, are not enough to transform the Spanish banking system into the key tool for the creation of wealth.There is a paradox of both legal and institutional outcomes. While, on the one hand, some positive changes in the functioning and the structure of the banking industry have been prompted by the regulatory reform, there are, on the other hand, some uncertainties linked to the recapitalisation costs of a relevant group of credit institutions and the persistence of serious structural problems of the Spanish economy.Moving faster to full banking union will reduce financial market stress in Spain.

‘Beggars Can’t Be Choosers’: Spain and the Financial Crisis

Abstract This contribution analyses the viability of the new Spanish financial landscape which has been drawn by the European authorities and the national administration in order to overcome the progressive deterioration of social wealth in Spain since the beginning of the economic crisis in 2008. The adoption and the implementation of a new legal framework during the last two years, establishing tougher requirements on capital adequacy, leverage ratios and counter-cyclical and other buffers, as well as the shaping of the Banking Union, are not enough to transform the Spanish banking system into the key tool for the creation of wealth. There is a paradox of both legal and institutional outcomes. While, on the one hand, some positive changes in the functioning and the structure of the banking industry have been prompted by the regulatory reform, there are, on the other hand, some uncertainties linked to the recapitalisation costs of a relevant group of credit institutions and the persistence of serious structural problems of the Spanish economy. Moving faster to full banking union will reduce financial market stress in Spain.

Banking Towards Development: Evidence from the Spanish Banking Expansion Plan

During the period 1965-1987 Spain was an emerging market in full transition from developing to developed status. During the same period the Spanish banking system underwent an unprecedented episode of expansion growing from 5,000 to over 30,000 bank branches. We examine whether the latter process partly caused the former by focusing on the relationship between branch expansion and entrepreneurship in the wholesale and retail trade industries. To address the non-random allocation of bank branches we exploit changes in branching policies that induced a plausibly exogenous time-varying pattern in the relationship between a municipality’s initial financial development and branch expansion. Our estimates, based on a panel data-set of over 2,000 Spanish municipalities, reveal that branch expansion had a strong positive impact on entrepreneurship. This effect was essentially driven by the savings banks, which have stronger regional development objectives than those held by the commercial banks, and which expanded more intensely into municipalities with more precarious financial services.

Assessing the risk-return trade-off in loan portfolios

This paper proposes a methodology to analyse the risk and return of large loan portfolios in a joint setting. I propose a tractable model to obtain the distribution of loan returns from observed interest rates and default frequencies. I follow a sectoral approach that captures the heterogeneous cyclical features of different kinds of loans and yields moments in closed form. I investigate the validity of mean–variance analysis with a value at risk constraint and study its relationship with utility maximisation. Finally, I study the efficiency of corporate and household loan portfolios in an empirical application to the Spanish banking system.