Additionally, in that period there was a strong contraction in the bank credit portfolios, which resulted from the sharp correction of the excessive debt built up by Spanish households and firms in the pre-crisis years and from banks’ loss of market share in the total financing of the economy. During those years, banks cushioned the balance sheet effect of this fall in their credit portfolios by increasing their exposure to other assets, especially through government debt purchases. As these debt securities provide lower returns than lending to households and firms, in the long run this portfolio rebalancing resulted in a fall in the average return on assets. However, when the sovereign debt crisis came to an end, the increase in value of these debt securities provided a positive, albeit short-lived, boost to profitability. This effect fades gradually once interest rates stop falling and, furthermore, in recent years banks have substantially reduced their holdings of these securities in the available-for-sale portfolio, which, since it is measured at market prices, is where these gains are recorded. On our estimates, the overall effect of these changes in asset composition – associated with the increase in non-performing loans and the decrease in the relative share of credit on balance sheets – would explain some 70% of the decline in net interest margin in the Spanish banking system between 2007 and 2018.
But under the current shareholder-centric model, these wider stakeholders are not given any control rights over management. This constrains their ability to rein in managerial excesses, even though their incentives to do so may be sharpest. In other words, the standard corporate governance model may be predicated on a misclassification of risk and, as a result, a misalignment between these risks and control rights, with potentially adverse implications for corporate risk-taking. Companies and society (a)  Externalities and systemic risk  At least for some types of firms, their actions can have an impact beyond internal stakeholders – shareholders, creditors, employees, customers and clients. They impose social externalities on the economy and wider society. If companies’ objectives are shareholder-centric, these externalities are unlikely to be internalised fully within firms’ decision-making. In other words, there is a potential disconnect between company and societal incentives. These externalities can be both good and bad. For example, many companies are in the business of creating public or quasi-public goods – for example, health, education, transport and utilities. And that is why, historically, their corporate governance structures have typically tended to weigh broader stakeholder and societal interests. In other cases, these social externalities may be negative – the creation of public “bads”. The classic example is environmental pollution. But these social externalities can also arise in more subtle ways – the mistreatment of customers and clients through delayed payment or mis-selling, exploitation of employees through inadequate working practices, or attempts to avoid paying sufficient tax to government.