Abstract
The banking system is an indicator of macroeconomic stability. Banking practices and regulation affect their operability, and hence, their efficiency in a competitive environment. Efficiency measures the optimal degree to which the needed resources to obtain the banking services are used. Knowledge on how to identify the combination of variables improves efficacy and, thus, assures the survival of financial entities in that competitive environment, also reinforcing macroeconomic stability. In this study the authors focus on Spain with the aim of analyzing the evolution of the efficiency in the Spanish banking system, segmented by size, during 2005 – 2020; thereby including different economic stages and regulation modifications carried out by the Bank of Spain about banking restructuring to improve its efficiency and profitability. Using the methodology of the analysis of ratios proposed by the International Monetary Fund, results evidence uneven effects for profitability and cost efficiency depending on the size of financial entities.
Top1. Introduction
The banking system is one of the most relevant indicators of macroeconomic stability (Drake et al., 2006; Hunjra et al., 2022; Khan, 2022; Pozo, 2023). Hence the proliferation of studies (see, among others: Barth et al., 2013; Bhatia et al., 2018; Blanco-Oliver, 2021; Chortareas et al., 2012; Gaganis & Pasiouras, 2013; Sarmiento & Galán, 2017) that analyze how banking practices and regulations affect their operability, and therefore, the efficiency to continue competing in a volatile scenario that moves around an economic and financial system that sets the pace for business development.
Regarding regulation, the European Banking Authority (EBA), as an independent institution of the European Union (EU), works and supervises the European banking sector with the aim of maintaining the financial stability in the EU and, therefore, ensuring the efficiency and correct operation of the banking sector. In the specific case of Spain, pursuant to the Spanish Royal Legislative Decree 4/2015 dated October 23, it is established that the Bank of Spain annually prepares a report about its supervising function regarding its intervention and procedures carried out, from which information about the Spanish banking system efficacy and efficiency can be deduced.
Efficiency is used to measure the optimal degree to which the needed resources to obtain the banking services have been used (Halkos & Salamouris, 2004; Tan, 2016). As Quesada (1994) indicates, an institution improves its efficiency when it reaches the same amount of output with the same or less amount of resources. Therefore, knowing how to identify the combination of variables gets efficacy to improve, which is the objective of any strategic plan of a financial institution because in proportion to this achievement, survival will be assured, not always easy in such a competitive environment. In fact, in recent years the structure of the Spanish banking system has changed (Delgado, 2012; Romani, 2012), with mergers and takeovers of institutions that try to take advantage of synergies to become more efficient and, therefore, more productive (Anthanassopoulos, 1998; Berger et al., 1993; Bhatia et al., 2018), starting this restructuring process with the regulatory effort of the Bank of Spain with the enactment of the Royal Decrees of 2012 (Delgado, 2012).
Despite the importance of the efficiency in the banking sector for any country and the special characteristics of the Spanish banking authority, the Bank of Spain, to the best of our knowledge we have not found studies in prior literature focusing on the study of the efficiency of the Spanish banking system and how it evolves over a long period of time, covering different economic moments, and in which the Bank of Spain has had a significant influence, due to its regulatory effect on the efficiency of banking institutions. Additionally, this is a research area that Berger et al. (1993) defined for future research.
All this has led us to consider the objective of this work, which is to study the evolution of efficiency in banking institutions in Spain, segmented by size, in the period from 2005 to 2020, of special interest, as it includes different economic stages, as well as regulations modifications relating to the regulation of the Spanish banking system that has encouraged its restructuring and with it the policies to improve its efficiency and with it its profitability, and thus encouraged not only the financial but also economic stability.
The methodology is the analysis of ratios used for the study of efficiency in the banking sector proposed by the International Monetary Fund (IMF) (2007), which are: general cost efficiency ratio; personnel cost efficiency ratio; return on assets (ROA); return on equity (ROE) and the ratio of the margin between the reference rates and the deposit rates.
Key Terms in this Chapter
Bank of Spain: National central bank in Spain and, within the framework of the Single Supervisory Mechanism (SSM), the supervisor of the Spanish banking system along with the European Central Bank.
Noninterest expense: Portion of a bank's expenses that are not funds paid to customers or other banks in the form of interest (for example: purchasing equipment, contracting professional services, wages and salaries, and advertising).
Loan loss provisions: Income statement expense set aside as an allowance for uncollected loans and loan payments. This provision is used to cover different kinds of loan losses such as non-performing loans, customer bankruptcy, and renegotiated loans that incur lower-than-previously-estimated payments.
Efficiency: The quality of achieving the largest amount of useful output using as little amount of inputs as possible.
ROA: The term Return on Assets (ROA) refers to a financial ratio that indicates how profitable a company is in relation to its total assets
Dynamic provisions: System by which loan loss provisions are recognized in the event of expected losses, allowing earlier detection and coverage of credit losses in loan portfolios. With this system, banks are allowed to build up a buffer in good times that can be used in bad times.
ROE: The term Return on Equity (ROE) is effectively the return on a company's net assets. It is often used to compare a company's profitability with its direct competition and/or companies in other industry sectors.