Why Did High Productivity Growth of Banks Precede the Financial Crisis?

46 Pages Posted: 15 Dec 2012

See all articles by Alfredo Martín‐Oliver

Alfredo Martín‐Oliver

University of the Balearic Islands

Sonia Ruano

Banco de España

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization

Date Written: December 14, 2012

Abstract

The observed high levels of banks’ operating efficiency, 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 1993-2000.

Keywords: productivity of banks, financial stability production function, IT capital, simultaneity bias

JEL Classification: D24, G21

Suggested Citation

Martin-Oliver, Alfredo and Ruano, Sonia and Salas-Fumás, Vicente, Why Did High Productivity Growth of Banks Precede the Financial Crisis? (December 14, 2012). Banco de Espana Working Paper No. 1239, Available at SSRN: https://ssrn.com/abstract=2189368 or http://dx.doi.org/10.2139/ssrn.2189368

Alfredo Martin-Oliver (Contact Author)

University of the Balearic Islands ( email )

Crtra. Valldemossa, km 7.5
Ed. Jovellanos
Palma de Mallorca, Illles Balears 07122
Spain

Sonia Ruano

Banco de España ( email )

Madrid 28014
Spain

Vicente Salas-Fumás

University of Zaragoza - Department of Business Administration and Organization ( email )

Dr. Cerrada 1
5005 Zaragoza
Spain
+34 976 761803 (Phone)

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