Abstract
This paper investigates how the European Union and Spanish changes to the regulation and the declaration of some unfair terms in mortgage loan agreements have affected the valuation of the Spanish banking industry. This paper has a dual legal and economic focus, and could consequently be of interest not only to financial institutions but also to the administrator of justice, which oversees the correct functioning of the financial system and the protection of consumer rights, in this case, mortgage holders. The empirical analysis was carried out using a sample of Spanish companies composed of 11 financial institutions that are listed, or have been listed, on the Madrid stock exchange and 24 non-financial companies listed on the IBEX-35 index. The period analysed was from December 2009 to March 2019. One of the main conclusions was the observation that, in general, the abnormal negative returns of financial institutions are greater when dealing with a decision from the Court of Justice of the European Union rather than from the Spanish Supreme Court. The events referred to as unfair terms that have had the most impact as a whole on the returns of shareholders were, because of their impact of the valuation of financial institutions, in order of importance, those relating to default interest charges, followed by rounding up, and, in last place, the unfair terms of floor clauses, mortgage constitution expenses and multi-currency loans.
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Notes
The financial crisis was especially important in the Spanish banking system since it affected our economy at a time when it was accumulating significant imbalances, coinciding with the crisis of the banking public debt and a deep recession. At that time, Spain had a clearly oversized banking system, excessively concentrated in lending resources for real estate and residential activities, and highly dependent on international wholesale financing. These important vulnerabilities made the cost of the crisis, in terms of GDP and of unemployment, very high and much higher than that of our main trading partners. Moreover, in recent years, the legal risk, linked to legal litigation, affecting Spanish banks has increased significantly. The entities have been involved in a large number of judicial processes in which certain contractual conditions of their mortgage operations were questioned. The cost of these processes for entities has already been made effective in many cases (for example, in the floor clauses, with more than 2200 million euros returned to clients until January 2019), but there are still very relevant legal proceedings pending resolution. Beyond the costs that these litigations may represent for entities, there is a more general implication, which is the loss of reputation that it means for the banking sector.
Directive 93/13/EEC –EDL 1993/15910 (5/4/2013) chooses to establish a dual mechanism: i) of formal control (of inclusion), Art. 5) refers to the clarity and intelligibility of terms, establishing that where there is doubt about the meaning of a term, the interpretation most favourable to the consumer shall prevail, and ii) material control (of content), with Arts. 2, 3, 4. and 6, affecting the validity of terms and defining their unfairness.
The Directive included an Annex with a list of UTs, which operated as a kind of “grey list”, allowing MSs to introduce “black lists” of UTs (Pérez Benitez 2017). This legislation entered into force on 1st January 1995, and MSs should have implemented measures in accordance with the European standard, something that they did not do. This means that, based on the opinion of some specialists, the evictions and foreclosure proceedings carried out after this date might have been unlawful.
Banco Santander bought Banco Popular in June 2017. It then took over its operation in September 2018.
The Euribor (European Interbank Offered Rate) is the reference European interbank offered rate for mortgage transactions and is published daily. It also shows the interest rate at which FIs lend money to each other on the interbank market.
The Civil Division of the Supreme Court (of Spain) dismissed the appeal filed by a FI against the judgment of the Provincial Court of Barcelona that ruled in favour of the consumers association Ausbanc, and ordered that the rounding up clause be declared null and void.
We should state that the successive judgments concerning this UT have followed a confusing path of interpretations related to when their retroactive effect should be applied, hence the existence of several relevant dates to be considered in the application of this event study.
That is, it was applied from the time of the publication of the judgment and not from when this clause appeared in the first signed mortgage agreements. The SSC ruled that the application of nullity of this UT with a retroactive effect could endanger the financial system, taking into account the large amount of money that FIs would have to refund to mortgage customers to whom said clause had been applied.
From 21st January 2017, FIs had to create, within one month, a specialised department to deal with claims made by customers on this subject, having to reply within a maximum period of three months from the submission of a claim. If no satisfactory agreement between the FI and the customer was reached by the end of said period, legal action could be taken.
See De Weerdt and García (2016) on the development of Spanish mortgage legislation.
The Spanish judge who heard the Aziz case (Martorell, Barcelona), in which enforcement proceedings were used against the plaintiff for the non-payment of €453, ruled that the sum owed represented 0.328% of the total mortgage loan, which amounted to €139,746.70, and that the eviction was a disproportionate measure. The judge ruled that in response to the non-payment of a mortgage repayment, only a claim for the debt and the interest incurred was lawful (Iglesias-Sánchez, 2014).
In April 2016, the CJEU was consulted regarding an eviction carried out by Banco Popular of a mortgage holder whose mortgage was securitised. A senior judge was asked: i) if the FI had sold said debt could begin foreclosure proceedings, ii) if it should not be the new owner of the debt who should begin mortgage foreclosure, and iii) if there was an obligation by the FI to inform the mortgage holder that said debt had been assigned to another lender.
An expense incurred for the execution of a mortgage in a public deed. This represents 70% of mortgage constitution expenses, and is the highest cost.
As of 28th February 2018, there was no consensus regarding which of these expenses should be refunded to customers by FIs. There are judges (of lower courts) that are forcing FIs to refund only the first three expenses, while other judges are forcing them to refund all expenses.
The total nullity of the agreement would have been strongly detrimental to the mortgage holder “who would have been forced to repay all the outstanding principal in one go”, which explains the partial nullity of the mortgage agreement.
In Spanish: Interés de referencia para préstamos hipotecarios (IRPH).
The power of the event study methodology improves as the number of companies in the sample increases and, accordingly, the probability of detecting abnormal return increases (Bhagat and Romano, 2007). However, as McWilliams and Siegel (1997) establish, different sample sizes have been used in event studies in the management literature (from 2 to 409) and it is possible to detect significant abnormal returns in small samples (Diaz-Díaz et al., 2017), as is the case with this study.
We carried out the event study using an international portfolio, such as that represented by the MSCI World Index (https://www.msci.com/developed-markets) as a reference for the market portfolio to avoid any possible bias of the national index. The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across all 23 developed market countries.
7 days is the sum of 3 days before the event date, plus 3 days after the event date. 11 days is the sum of 5 days before the event date, plus 5 days after the event date.
The European banks selected in this case are those that are included in at least one of the two indexes (FTSE 100 and EUROSTOXX 50), excluding the two Spanish banks.
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Acknowledgements
The authors acknowledge the financial support from Junta de Andalucía, Spain, through Project SEJ_555 and the financial support through the Jean Monnet Module in “EU Finance and Institutions: New Social and Environmental Challenges” (620132-EPP-1-2020-1-ES-EPPJMO-MODULE). The authors would also like to thank two anonymous reviewers for their useful comments.
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Appendices
Appendix 1: Sample composition
Name | Industry |
|---|---|
BANESTO | Banking |
BANKIA | Banking |
BANKINTER | Banking |
BBVA | Banking |
CAIXABANK | Banking |
LIBERBANK | Banking |
POPULAR | Banking |
SABADELL | Banking |
SANTANDER | Banking |
UNICAJA BANCO | Banking |
VALENCIA | Banking |
ACCIONA | Non banking |
ACERINOX | Non banking |
ACS ACTIV.CONSTR. Y SERV. | Non banking |
AENA SME | Non banking |
AMADEUS IT GROUP | Non banking |
ARCELORMITTAL (MAD) | Non banking |
CELLNEX TELECOM | Non banking |
CIE AUTOMOTIVE | Non banking |
ENAGAS | Non banking |
ENCE ENERGIA Y CELULOSA | Non banking |
ENDESA | Non banking |
FERROVIAL | Non banking |
GRIFOLS ORD CL A | Non banking |
IBERDROLA | Non banking |
INDITEX | Non banking |
INDRA SISTEMAS | Non banking |
INMOBILIARIA COLONIAL | Non banking |
INTL.CONS.AIRL.GP. (MAD) (CDI) | Non banking |
MAPFRE | Non banking |
MASMOVIL IBERCOM | Non banking |
MEDIASET ESPANA COMUNICACIÓN | Non banking |
MELIA HOTELS INTL. | Non banking |
MERLIN PROPERTIES REIT | Non banking |
NATURGY ENERGY | Non banking |
RED ELECTRICA | Non banking |
REPSOL YPF | Non banking |
SIEMENS GAMESA RENEWABLE ENERGY | Non banking |
TELEFONICA | Non banking |
VISCOFAN | Non banking |
Appendix 2: Sample composition-European banks
Name | Country |
|---|---|
BARCLAYS | Uk |
BNP PARIBAS | France |
HSBC HOLDINGS | UK |
ING GROEP | Netherland |
INTESA SANPAOLO | Italy |
LLOYDS BANKING GROUP | UK |
ROYAL BANK OF SCTL.GP. | UK |
SOCIETE GENERALE | France |
STANDARD CHARTERED | UK |
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Cardone-Riportella, C., García-Olalla, M. Changes to the regulation and the declaration of unfair terms in mortgage agreements: an event study approach to the Spanish Banking Industry. Eur J Law Econ 51, 157–181 (2021). https://doi.org/10.1007/s10657-020-09678-y
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DOI: https://doi.org/10.1007/s10657-020-09678-y