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

Alfredo Martin-Oliver, Sonia Ruano and Vicente Salas-Fumás
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Sonia Ruano: Banco de España
Vicente Salas-Fumás: Universidad de Zaragoza

No 1239, Working Papers from Banco de España

Abstract: The observed high levels of banks’ operating efficiency, profi ts and market values in the years before the financial crisis raise reasonable doubts about the information content of conventional performance measures for the accurate assessment of the efficiency 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 (search for similar items in EconPapers)
JEL-codes: D24 G21 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2012-12
New Economics Papers: this item is included in nep-cba and nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1239

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