We investigate the effects of countercyclical prudential buffers on bank risk-taking. We exploit the introduction of dynamic loan loss provisioning in Spain, mandating that banks use historical average loss rates in their estimation of loan loss provisions. We find that dynamic loan loss provisioning is associated with reductions in timely loan loss provisioning. Banks that previously recognized loan losses in a timely fashion exhibit the greatest reductions in timeliness and consequently extend loans to riskier borrowers with lower accounting quality. Our results have policy implications for the debate on the use of financial reporting requirements in mitigating capital pro-cyclicality.

We investigate whether and how SMEs’ credit quality influences their substitution of bank credit for trade credit. Using data from the five largest European countries, we find that substitution of bank credit for trade credit decreases during the financial crisis, but it decreases significantly less for ex ante low credit quality firms. We control for pre-crisis or lagged firm characteristics including size and external finance dependence, industry effects, sample selection effects and cross-country heterogeneity. We also find that low credit quality firms increase their absolute and relative trade credit usage significantly more than high credit quality firms during the financial crisis. The effects are consistent across countries and stronger for net trade credit borrowers and financially constrained firms. The evidence highlights how credit quality influences demand-side driven substitution in SME finance.

After the financial crisis of 2007–2008, some bank performance dimensions have been the subject of debate, two of which are bank efficiency and bank risk-taking behavior. The literature on bank efficiency and productivity has grown considerably over the past three decades, and has gained momentum in the aftermath of the financial crisis. Interest in bank risk-taking behavior, usually focusing on its links to monetary policy, has been relatively low, but has also increased exponentially in more recent years. This article combines these two streams of research. Specifically, we test whether more inefficient banks take greater risks when selecting borrowers, charging interests, and requiring collateral, and whether these links between inefficiency and risk change according to the type of bank. Our analysis centers on the Spanish banking system, which has been severely affected by the burst of the housing bubble and has undergone substantial restructuring. To test our hypotheses, we created a database with information on banks and savings banks, their borrowers (non-financial firms), and the links between them. The study also contributes to the literature by considering a novel profit frontier approach. Our results suggest that more inefficient banks take greater risks in selecting their borrowers, and that this high-taking behavior is not offset by higher interest rates. JEL CLASSIFICATION C14; C61; G21; L50

The analysis of efficiency and productivity in banking has received a great deal of attention for almost three decades now. However, most of the existing literature to date has not explicitly accounted for risk when measuring efficiency. We propose an analysis of profit efficiency taking into account how the inclusion of a variety of bank risk measures might bias efficiency scores. Our measures of risk are partly inspired by the literature on earnings management and earnings quality, considering that loan loss provisions, as a generally accepted proxy for risk, can be adjusted to manage earnings and regulatory capital. We also consider some variants of traditional models of profit efficiency where different regimes are stipulated so that financial institutions can be evaluated in different dimensionsi.e. prices, quantities, or prices and quantities simultaneously. We perform this analysis on the Spanish banking industry, whose institutions are deeply affected by the current international financial crisis, and where re-regulation is taking place. Our results can be explored in multiple dimensions but, in general, they indicate that the impact of earnings management on profit efficiency is of less magnitude than what might, a priori, be expected, and that the performance of savings banks has been generally worse than that of commercial banks. However, savings banks are adapting to the new regulatory scenario and rapidly catching up with commercial banks, especially in some dimensions of performance.

The literature analysing the efficiency of financial institutions has evolved rapidly over the last 20 years. Most research has focused on the input side, analysing either cost, input technical efficiency or input allocative efficiency, whereas comparatively fewer studies have examined the revenue side. However, both sides are relevant when evaluating banks' performance. This article explicitly explores how serious it may be to confine the analysis to one side of banks' activities only, comparing the efficiencies yielded by either minimising costs or maximising revenues. We focus on the Spanish banking sector, which is currently undergoing a profound process of change and restructuring. The application shows how severely biased the analysis is when only a partial efficiency measurement is conducted. It also shows the growing relevance of the issue since the beginning of the financial crisis.

In this paper, we provide empirical evidence for the impact of disciplinary sanctions imposed on Spanish auditing firms and their engagement partners. The disciplinary sanctions resulted from external investigations, which revealed misapplications of auditing standards. In particular, we evaluate (a) the efficacy of the external supervisory board in identifying low-quality auditors and (b) the effectiveness of the disciplinary system in improving the quality of subsequent statutory audits performed by the sanctioned auditors. We employ two earnings management indicators as proxies for audit quality: loss avoidance through extraordinary items and abnormal accruals. And we compare these measures in the financial statements of client companies (auditees) audited by sanctioned and non-sanctioned auditors between 1995 and 2007. Our evidence is mixed. The results show that companies audited by Non-Big 4 sanctioned auditors in the pre-inspection period are less likely to avoid bottom-line losses. Additionally, we conclude that use of this earnings management tool decreases in the post-investigation period for all sanctioned auditors, whether Big 4 or Non-Big 4 firms. Contrary to our expectations, the enhancement performance on this measure of audit quality is observed only for smaller fines. The discretionary accrual approach to earnings management does not offer significant results, however. Therefore, the conclusions are not robust, and further investigation is needed. A feasible explanation for the elusive conclusion may be based on the strong incentives for private firms to avoid bottom-line losses for financing purposes and to manipulate earnings to minimize tax payments.

We investigate the effect of an exogenous change in loan loss provisioning rules on bank risk taking. To identify the effect we exploit that only banks that revealed a high conditional accounting conservatism (CAC) in the pre-adoption period should respond to the change. We conduct a difference-in-differences analysis using a large sample of matched bank-firm data around the introduction of the dynamic loan loss provisions in Spain in 2000. The main result is that banks with a high CAC in the pre-adoption period significantly increased their risk taking in the post-adoption period. These banks lend significantly more to ex ante riskier borrowers, accept more borrowers with lower accounting quality, and they display a higher loan growth. Our findings on bank risk taking are consistent with reduced screening and monitoring incentives and highlight unintended side effects of the change in the loan loss provisioning rules for banks.

We study the effects of the interplay between deregulation and governance on risk-taking in the financial industry. We consider the removal of regulatory geographic constraints for savings banks in Spain, the cajas, which led to a nationwide expansion of these banks during the past two decades. Based on a unique dataset that combines information on the geographic distribution of bank lending, matched lender-borrower financial statements, and borrower defaults, we find that the governance of the savings banks significantly affects the way in which they expand their lending activities. Savings banks that are subject to political influence by regional governments exhibit higher ex ante risk-taking and higher ex post loan defaults. Our study highlights the broader implications of the impact of global deregulation and consolidation and their interaction with governance issues.

Economic liberalization can go wrong when the objectives and corporate governance of the firms in the deregulated industry are not adequately taken into account. This column presents evidence on the deregulation of the Spanish savings banks, known as cajas, which led to a dramatic expansion of lending and branching, increase in risk taking, and the final implosion of the whole savings bank sector in Spain in 2012.

This article analyzes the effects of geographic expansion on the productivity of Spanish savings banks. The study uses data from 1992 to 2004, the period when most savings banks expanded geographically. We consider an alternative approach to most multi-stage studies, which uses nonparametric methods both to measure productivity growth and to analyze its relationship with branch office expansion. Specifically, we use nonparametric regression techniques and their natural complement, conditional density estimation. Results indicate that savings banks that expand geographically outside their natural markets achieve greater productivity gains. However, there are some firms for which this result is more moderate. In contrast, lower increases in productivity are found in savings banks that expand on a nationwide basis, or that confine their territorial expansions to their traditional markets.

We study the effects of the interplay between banking deregulation and corporate governance on the lending behavior of savings banks in Spain. The removal of branching barriers that constrained these banks has led to a nationwide expansion, increasing the number of their branches and their commercial lending volume dramatically. Analyzing a unique data set combining information on the geographic distribution of bank branches and matched lenderborrower financial statements during 1996-2004, we provide evidence that suggests that the governance of those banks affects the way in which they expand their lending activities. In particular, political influence affects where they expand and their ex ante risk taking behavior. Because most countries have a portion of their banking system that is not privately owned, the behavior of these Spanish savings banks may have broader implications about the impact of global banking deregulation and industry consolidation and their interaction with bank governance.

Additional evidence is provided on expiration effects in the Ibex 35 stock index futures market using realized volatility as proposed by T. G. Andersen, T Bollerslev, F. X. Diebold, and P. Labys (2003). Findings reveal not only a significant increase in spot trading activity, but also the existence of a significant jump in spot volatility at index futures expiration. Moreover, the. importance of the data frequency considered is analyzed. Our research reveals that the use of GARCH methodology from daily data does not have the ability to statistically assess such expiration-day effect. Additional empirical evidence is provided for the S&P 500 stock index futures market. Neither unconditional nor conditional realized volatility has a significant increase at expiration for the U.S. market, suggesting that this effect is specific for the Spanish market, at least for the period analyzed. (c) 2006 Wiley Periodicals, Inc.

The purpose of this paper is to analyze the relationship between the productive efficiency of Spanish banks, whose shares are traded in the Spanish stock market, and their market returns. Based on recent theoretical contributions that relate the efficiency with bank management quality, we first analysed the effect of efficiency on the systematic risk of market shares, without the results of the estimates showing a significant relationship between both variables. Since efficiency is a fundamental determinant of the profitability of banks, this case suggests the existence of positive abnormal returns in favor of the most efficient banks. The given empirical evidence confirms this hypothesis, establishing a direct relationship between the productive efficiency of the Spanish banks and the anomalous present and future returns of their shares. El objetivo de este trabajo consiste en analizar la relacion entre la eficiencia productiva de los bancos espanoles que cotizan en bolsa y sus rendimientos bursatiles. En base a recientes aportaciones teoricas que relacionan la eficiencia con la calidad de la gestion, se contrasta en primer lugar el efecto de la eficiencia sobre el riesgo sistematico de las acciones de los bancos, sin que los resultados de las estimaciones muestren una relacion significativa entre ambas variables. Dado que la eficiencia es un determinante fundamental de la rentabilidad de las entidades financieras, esta circunstancia sugiere la existencia de rendimientos anomalos positivos en favor de los bancos mas eficientes. La evidencia empirica suministrada confirma esta hipotesis, estableciendo una relacion directa entre la eficiencia productiva de los bancos espanoles y los rendimientos anomalos -tanto presentes como futuros- de sus acciones.

El objeto de este trabajo consiste en analizar la relacion entre la eficiencia productiva de los bancos espanoles que cotizan en bolsa y la evolucion de sus rendimientos bursatiles. Dado que la eficiencia es un indicador de la calidad de la gestion de los bancos, se contrasta en primer lugar el efecto de la eficiencia sobre el riesgo, medido a traves a traves de la beta de carteras formadas por bancos de distinto nivel de eficiencia. Los resultados de las estimaciones nos muestran una relacion significativa entre ambas variables. Puesto que la teoria economica sostiene que existe una relacion directa entre eficiencia y rentabilidad, la ausencia de una relacion entre riesgo y eficiencia sugiere la existencia de rendimientos anomalos positivos en favor de los bancos mas eficientes. La evidencia empirica suministrada en este trabajo confirma esta hipotesis, estableciendo una relacion directa entre la eficiencia de los bancos y los rendimientos anomalos de sus acciones tanto presentes como futuros. Esta circunstancia que indica que el mercado no anticipa adecuadamente el efecto de la eficiencia sobre la rentabilidad futura de los titulos, no debe, sin embargo, alimentar el rechazo de la hipotesis de eficiencia semi-fuerte del mercado, por cuanto que el coste de obtencion del indice de eficiencia, en terminos de tiempo aprendizaje, podria justificar las ganancias derivadas de su utilizacion por parte de los operadores.