Banking reforms and bank efficiency: Evidence for the collapse of Spanish savings banks

Abstract

This paper analyzes the impact of the banking system reform implemented through the banking consolidation (mergers and acquisitions) carried out in Spain to address the collapse of savings banks. The 2008 global financial crisis triggered a sovereign debt crisis in Europe and the burst of a real estate bubble in Spain, and forced a government intervention, despite policymakers not yet having developed a clear guidance for addressing banking crises. We therefore explore to what extent the efficiency of the Spanish financial system increased as the troubled savings banks merged with each other and/or were acquired by healthy savings or commercial banks. Our findings show that this Spanish banking reform impacts positively on the banking performance in terms of both bank efficiency and bank solvency. Consequently, banking reform via M&A drives out unviable banks and is a feasible alternative that minimizes the negative effects of government interventions in the financial systems.