Alfredo Martín‐Oliver

The output and profit contribution of information technology and advertising investments in banks

This paper examines the contribution of investments in Information Technology (IT) and in advertising to the output and profits of Spanish banks, in the period 1983-2003. We find that the growth in the stock of IT capital explains one third of output growth of banks, and that an additional investment in IT of one million euros may be substituted for twenty-five workers. The paper also finds that advertising investments increase the demand for bank services with an elasticity of 0.22 for deposits and 0.11 for loans. For all the assets considered, the null hypothesis that banks use the profit-maximizing amount of services per period cannot be rejected with the data.

IT assets, organization capital and market power: Contributions to business value

How much IT capital contributes to the economic value of firms is a relevant but complex issue, since the contribution may come from different sources that are difficult to separate. In this paper, we model the determinants of the economic value of multi-asset firms with market power when the adjustment costs of investing in IT capital turn into organization capital, increasing the future cash flow of the firm. The resulting valuation equation, new in the literature, has four simultaneous sources of economic value: (i) purchase costs of the assets, (ii) adjustment costs, (iii) organization capital, and (iv) rents from market power. The model is tested with a unique data base from Spanish banks in a time period when these banks invested heavily in IT capital. We find that 54% of the economic value of the representative bank corresponds to the purchase cost of material and immaterial assets, including IT capital. The remaining 46% corresponds to the contributions of: adjustment costs (17%), organization capital (7%) and rents from market power (22%).

Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer’s search costs in retail banking, consistent with predictions from the Carlson and McAfee (J Polit Econ 91:480–493, 1983) model of market competition with search costs.

From Proximity to Distant Banking: Spanish Banks in the EMU

This paper examines the nature of competition in the Spanish banking industry during the years before and after Spain joined the European Monetary Union (EMU). The paper models competition in a product-differentiated market where banks choose from a list of price (interest rates of loans and deposits) and non-price variables (branches, advertising, IT capital). The empirically estimated demand and cost functions are used to simulate the values of the endogenous variables of the representative bank in response to the historically low official interest rates of the post Euro period. The results show that there has been a convergence in the levels of price competition in the loans and deposits markets during the post Euro period. Additionally, the paper finds that branches have lost weight in the mix of competition variables in benefit of advertising and IT capital. This is interpreted as evidence that traditional proximity banking is evolving towards distant banking. Finally, the simulation results highlight the high imbalances between loans and deposits for the representative bank in the regime of low official interest rates of the Euro zone.

Securitization and Banks’ Capital Structure

Asset securitization offers banks the possibility of altering their capital structures and the financial intermediation process. This study shows that the introduction of securitization is associated with fundamental changes in the funding policies of banks. In particular, we present evidence of more intense use of securitization by banks (i) with stronger growth opportunities; (ii) with liquidity constraints; (iii) with costlier alternative sources of funding; and (iv) with restricted access to capital markets owing to adverse selection. Securitization is also observed to be higher on the pecking order of financing choices of small and medium-sized banks and non-listed banks, which are likely to face more severe adverse selection problems

Why did high productivity growth of banks precede the financial crisis

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.

Measurement of Capital Stock and Input Services of Spanish Banks

This paper contains estimates of physical and intangible (information technology, advertising and training) capital stock, together with capital, labor and externally provided input services, of Spanish commercial and saving banks in the period 1983 to 2003. Capital stocks are valued at replacement costs and assets’ services flows are computed using estimates of the risk-adjusted user cost of capital. Replacement costs of assets are substantially higher than book values and economic estimates of costs of input services allow for more accurate measures of efficiency and productivity of banks.

IT Investment and Intangibles: Evidence from Banks

This paper models the investment behaviour of a multi-asset firm with market power that accumulates valuable intangible assets to complement the IT capital. The investment model is estimated using data from Spanish banks on assets of different nature: material (branches, financial), immaterial (advertising and IT) and intangible (training of workers). The paper estimates that the representative bank spends five additional Euros per Euro invested in IT-related assets in complementary intangible assets or, equivalently, intangibles amount to approximately 10% of the economic value of the representative bank. The remaining economic value is distributed between 28% from rents attributed to market power, and 62% to the cost of market-purchased assets.

Effects of Equity Capital on the Interest Rate and the Demand for Credit: Empirical Evidence from Spanish Banks

We examine the consequences of imposing higher capital requirements on banks (as under Basel III or, recently, in the case of large banks in the European context) for bank dynamics in complying with the new standards and for the long-term effects on bank lending rates and the demand for bank credit. The analysis combines econometric estimations of the determinants of equity capital ratios and lending rates with simulations of market equilibrium results for loan interest rates and the demand for bank credit, based on a parameterised model of the Spanish banking industry. We find that the gap between the target and the actual capital ratio is reduced by around 40% every year, mainly with retained earnings. We also find that raising the equity capital ratio by one percentage point increases bank lending rates by 4.2 basis points. Finally, the simulation exercise shows that the estimated increase in the cost of funds for banks associated with a one percentage point increase in the equity capital ratio leads to a fall of 0.8% in the total demand for bank credit. These results suggest that the social costs of higher equity capital requirements for banks are expected to be greater in the transition period, when banks are adjusting to the new standards, than in the steady state of the new industry equilibrium, when all banks comply with the new ratio

Productivity of Banks: Implications for Interest Rates, Economic Profits and Branches.

This paper examines the transmission of productivity differences among banks and of industry productivity growth over time to lower (higher) interest rates of loans (deposits) and higher customer accessibility to bank services. For this purpose, it models spatial competition in retail banking among bank branches with different productivity level. In the short-term banks compete in interest rates. In the mid-term, banks expand their network of branches until economic profits per branch converge to zero. In equilibrium, banks that are more productive set lower (higher) interest rates of loans (deposits) and their market share increases as a result of both a higher demand of loans and deposits per branch and a larger network of branches. The model fits well the data for Spanish banks over period 1993-2007.