A key feature of financial services liberalization is increasing banking-sector globalization. Using different measures to capture this phenomenon, the present study examines its impact on banking crisis for a dataset of 138 nations spanning the period 1998–2013, while controlling for other banking-industry specific, macroeconomic and external factors. Employing different econometric models and several robustness checks, I find greater banking sector globalization to reduce the occurrence of banking crisis. Moreover, greater bank asset concentration, diversification, credit flows, real interest rates, inflation rates, M2-to-foreign exchange reserves and nominal exchange rate depreciations significantly increase the likelihood of banking crisis, while higher bank profits, real GDP growth, economic development and economic freedom lower such chances. The results are further examined for nations across different levels of economic development and with different degrees of foreign bank penetration. The findings underscore that foreign bank presence provides greater financial stability in the banking industry of host nations.

The present study examines state-level banking-industry specific as well as region economic determinants of non-performing loans for all commercial banks and savings institutions across 50 US states and the District of Columbia for 1984–2013. Using both fixed effects and dynamic-GMM estimations, I find greater capitalization, liquidity risks, poor credit quality, greater cost inefficiency and banking industry size to significantly increase NPLs, while greater bank profitability lowers NPLs. Moreover, higher state real GDP and real personal income growth rates, and changes in state housing price index reduce NPLs, while inflation, state unemployment rates, and US public debt significantly increase NPLs. The findings imply that regular stress tests on banks’ loan quality that typically underpin scenarios for a rise in NPLs, should take into account the impact of ‘micro’ or state-level economic conditions on NPLs, in addition to banks’ capital and credit quality, and effective cost management in assessing banks financial health.

Using variation in the timing and location of branches of failed banks we analyze its effect on income inequality. Employing a difference-in-differences specification we find that bank failures increased the GINI by 0.3 units (or 0.7%). We show that the rise in inequality is due to a decrease in the incomes of the poor that outpaces declines of the rest. We further show that individuals with lower levels of education exhibit a relatively greater decline in real wages and weekly hours worked. Exploring channels of transmission, we find income inequality is explained by a general decline in small business loans. This in turn reduces net new small business formation and their job creation capacity, a sector that hires a substantial share of low-income earners.

Using firm-level data, we study the impact of bank failures on corporate innovation. We find that exposure to a bank failure reduces the number of patents by 0.34 and citations by 0.35, implying a loss of 21% and 22%, respectively. Such effects are most pronounced for explorative innovation and for firms more dependent on external financing. These effects point to the interdependence between bank failures and corporate decisions, highlighting an important role for government intervention. We show that the TARP helped banks to reduce such pernicious effects on innovation, which is primarily driven by TARP recipient banks headquartered in the county of the bank failure and by large TARP receiving banks.