Did Good Cajas Extend Bad Loans? Governance, Human Capital and Loan Portfolios

Did financial institutions with better governance arrangements weather the recent financial crisis better? And how about those with more qualified chairmen? We answer these questions in the context of the Spanish Savings and Loans (Cajas). We find that neither formal governance institutions (e.g. the way the board is appointed) nor real governance (e.g. the actual composition of the board and the role played by political parties in it) are highly correlated with the composition of the loan book at the peak of the financial crisis (the size of the portfolios of real estate and individual loans) or with the performance of these loans (the amount of non performing loans in the crisis or the decrease in ratings). On the other hand, we find a clear and significant impact of the human capital of the Caja chairmen on the measures of loan book composition and performance. In particular, we find that (1) Cajas whose chairman was previously a political appointee have had significantly worse loan performance; (2) Cajas whose chairman did not have postgraduate education have significantly worse performance; and (3) Cajas whose chairman had no banking experience had significantly worse performance.We examine the implications of these findings for our understanding of the origins of the crisis and for the future regulation of the Cajas.