Why high productivity growth of banks preceded the financial crisis

The high levels of operating efficiency, profits, and market values for banks in the years before the financial crisis raise reasonable doubts about the accuracy of the assessments of the efficiency of banking intermediation. We examine the productivity growth in Spanish banks in the pre-crisis period by separating out the contributions to productivity growth from business practices and from industry-wide technological progress. We find that more than two thirds of the estimated productivity growth in the years 2000-2007 is attributed to banks' practices, such as the expansion of credit in the housing market, the high recourse to securitization and short-term finance, the reduction in liquidity holdings, and the leveraging process of banks' balance sheets, that the literature claims are the ultimate causes of the crisis. We estimate that the remaining cumulative annual growth rate is 2.8% for the industry's technical progress, which is similar to that in the period of 1992-2000. (C) 2013 Elsevier Inc. All rights reserved.