In hindsight the signs of a developing housing bubble appear as clear in Spain as in the US or Ireland: Real Estate prices grew, in real teams, by over 100% between 99 and 2007. And yet up to 2007 real estate loans continued funding one of the largest real estate booms in the world, so that 860,000 housing starts took place in 2006.
Fully two thirds of the housing units built in Europe between 99 and 07 were built in Spain. By the end of all of the construction boom (end of 2008), the stock of loans to real estate developers and builders reached almost 500bn euros, equivalent to 50% of Spainms GDP. This lending bonanza appears foolish in hindsight: some investment banks now estimate that up to 50% of loans to developers will be irrecoverable.
Not all lenders took the same decisions. In fact, as we document below, the performance differential between different lenders are huge: the share of real estate loans in the Cajas booksmat the of the boom (2006) ranges, in our sample, between just over 10% and almost 50%, and the share of non'performing loans in the Summer of 2009 also ranges widely, between just over 1% and close to 7%. The question we study in this paper is what accounts for such heterogeneity. In particular, we study whether differences in human capital and in governance can partly account for it.
By answering this question, we hope to illuminate the current policy debate in Spain on the regulation of this segment. Some of the Cajas are among the most successful commercial banks in Spain, but there is a lot of heterogeneity in their performance. Our aim is to explain part of this heterogeneity in performance on the basis of governance and human capital issues.
This is a particularly important exercise insofar Cajas are an unusual segment of the Spanish financial sector, characterized by heavy political involvement; as a result, moves towards changing the regulation of the segment are continuously being discussed. Moreover, Cajas do not have tradeable participations and are not quoted in the stock market' thus take'overs and other control mechanisms relying on the share price, which play a role in banks do not act as automatic disciplining channels here.
Beyond this narrow policy objective, we hope that this study of the Cajas will contribute to illuminate the general debate on decision making up to the crisis on the conflicting role of incentives and bounded rationality on it. One side of the debate argues that those in charge of the key decisions may not have been informed enough, knowledgeable enough, or smart enough to understand what they were doing' a case of lbounded rationalitym; the other side argues that they may have foreseen it, but it may not have been in their interest to do the right thingq in other words, their incentives were misaligned, and the corporate governance arrangements put in place by the shareholders and other stakeholders did not impose the necessary discipline.
Of course, a third option is possible, namely that those lending decisions were, at the time, optimal and only appear wrong'headed to us, in retrospect. Our data will allow us to differentiate at least partially among these three hypothesis, and thus hopefully will help us clarify the general debate on the roots of the ongoing worldwide financial crisis.
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PDF Ebook Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios
