Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios

Vicente, Cuñat and Luis, Garicano (2010): Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios. Published in: The Crisis of the Spanish Economy: Economic Analysis of the Great Recession. (Samuel Bentolila, Michele Boldrin, Javier Diaz-Gimenez and Juan J. Dolado eds)

Abstract

Did financial institutions with better governance arrangements weather the recent financial crisis better? And how about those with more qualified chairmen? We answer these questions in the context of the Spanish Savings and Loans (Cajas). We find that neither formal governance institutions (e.g. the way the board is appointed) nor real governance (e.g. the actual composition of the board and the role played by political parties in it) are highly correlated with the composition of the loan book at the peak of the financial crisis (the size of the portfolios of real estate and individual loans) or with the performance of these loans (the amount of non performing loans in the crisis or the decrease in ratings). On the other hand, we find a clear and significant impact of the human capital of the Caja chairmen on the measures of loan book composition and performance. In particular, we find that (1) Cajas whose chairman was previously a political appointee have had significantly worse loan performance; (2) Cajas whose chairman did not have postgraduate education have significantly worse performance; and (3) Cajas whose chairman had no banking experience had significantly worse performance.We examine the implications of these findings for our understanding of the origins of the crisis and for the future regulation of the Cajas.

• Item Type: MPRA Paper
• Language: English
• Keywords: savings banks, crisis, human capital, CEOs
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General

References

Agrawal, Ashwini (2008)"Corporate Governance Objectives of Labor Union Shareholders: Evidence from Proxy Voting," Mimeo NYU

Crespi, Rafael, Miguel Angel. Garcia-Cestona and Vicente Salas (2004) Governance Mechanisms in Spanish Banks, Does Onwership Matter? Journal of Banking and Finance 28.

Ferreira, Daniel (2010), Board Diversity, in Corporate

Governance, R. Anderson and H.K. Baker (eds.), Wiley & Sons. Fishman Raymond (2001) Estimating the Value of Political Connections, American Economic Review, September, 91(4):1095-1102.

Garcia-Cestona, M. / Surroca, J. (2008) Multiple goals and ownership structure: Effects on the performance of Spanish savings banks, European Journal of Operational Research, 187 (2): 582-599

García-Posada, Miguel and Josep M.a Vilarrubia (2008). “Map of the International Exposure of the Spanish Economy.” Occasional Papers of the Bank of Spain, 0807.

Garicano, Luis (2000), “Hierarchies and the Organization of Knowledge in Production.” Journal of Political Economy, 108(5): 874-904.

Harford, Jarrad, Dirk Jenter, and Kai Li. 2007. “Conflicts of Interest among Shareholders: The Case of Corporate Acquisitions.” MIT Sloan Research Paper No. 4653-07.

Hart, John and Oliver Hart (2005). “The Design of Hierarchies: Coordination versus Specialization.” Journal of Political Economy , 113 ( 4):675-702.

Illueca, Manuel, Lars Norden, and Gregory F. Udell (2008) Liberalization, Corporate Governance, and Savings Banks, EFA 2008 Athens Meetings Paper

Matvos, Gregor, and Michael Ostrovsky. (2008). “Cross-ownership, Returns, and Voting in Mergers.” Journal of Financial Economics, 89: 391-403.

Mian, Atif, Amir Sufi and Francesco Trebbi (2009) The Political Economy of the U.S. Mortgage Default Crisis, American Economic Review, forthcoming

Mian, Atif and Asim Khwaja (2005) Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market, Quarterly Journal of Economics, 120(4), November 2005.

Qian, Yingyi, “Incentives and Loss of Control in an Optimal Hierarchy”, The Review of Economic Studies, 61(3): 527-544.

Salas, Vicente. Jesus Saurina (2002) Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks- Journal of Financial Services Research,- Springer

Sumner, Steven W. and Elizabeth Webb (2009) Does Corporate Governance Determine Bank Loan Portfolio Choice? Mimeo University of San Diego, San Diego, California

Tortosa, Emili. (2002) "Exploring efficiency differences over time in the Spanish banking industry," European Journal of Operational Research 139, 643-664.