This article introduces a special issue on lessons from the recent crisis on finance, growth, and stability. The papers in the special issue discuss (i) the benefits and risks of financial innovation and regulatory responses to these risks, (ii) the effect of finance and globalization on the real economy, and (iii) the role of government in providing credit guarantees. This introductory article provides a broader view on these issues and closes with ideas on the future research agenda in this field.

Recently, developing countries have witnessed a sharp increase in foreign bank participation. We examine the impact on banking outreach using newly gathered data for Mexico, where foreign bank participation rose from 2% to 83% of assets during 1997–2005. Country-, bank-, and bank-municipality-level estimations show a decline in the number of deposit and loan accounts. While country- and bank-level estimations indicate an increase in the share of municipalities with bank branches and in the likelihood of bank presence, bank-municipality regressions show that only rich and urban municipalities benefited. Overall, the evidence is consistent with a decline in outreach.

This paper presents recent research on access to finance by small and medium-size enterprises (SMEs). SMEs form a large part of private sector in many developed and developing countries. While cross-country research sheds doubt on a causal link between SMEs and economic development, there is substantial evidence that small firms face larger growth constraints and have less access to formal sources of external finance, potentially explaining the lack of SMEs’ contribution to growth. Financial and institutional development helps alleviate SMEs’ growth constraints and increase their access to external finance and thus levels the playing field between firms of different sizes. Specific financing tools such as leasing and factoring can be useful in facilitating greater access to finance even in the absence of well-developed institutions, as can systems of credit information sharing and a more competitive banking structure.

This paper documents large cross-country variation in the relationship between bank competition and bank stability and explores market, regulatory and institutional features that can explain this variation. We show that an increase in competition will have a larger impact on banks’ fragility in countries with stricter activity restrictions, lower systemic fragility, better developed stock exchanges, more generous deposit insurance and more effective systems of credit information sharing. The effects are economically large and thus have important repercussions for the current regulatory reform debate.

Theoretical and empirical work on banking emphasizes the role of banks in overcoming information asymmetries and agency problems between borrowers and lenders. This paper investigates the importance of bank ownership in determining the sorts of customers that a bank serves, and consequently, the sorts of information problems a bank lender chooses to address. Using survey data for over 16,500 households from 19 emerging economies in Central and Eastern Europe in 2010 this paper is the first to document that information asymmetries in the retail credit market lead foreign banks to cherry-pick financially transparent clients in similar ways as documented previously for enterprise credit. First, a higher market share of foreign banks in a country is associated with a larger gap in credit use between households with and without formal employment. Second, among mortgage borrowers, clients of foreign banks are more likely to be formally employed, are more likely to have personal assets, and are richer than clients of domestic banks. Third, consistent with these results, retail lending techniques of foreign banks rely more on financial information and collateral than those of domestic banks.

We assess the effect of privatization on performance in a panel of Nigerian banks for the period 1990–2001. We find evidence of performance improvement in nine banks that were privatized, which is remarkable given the inhospitable environment for true financial intermediation. Our results also suggest negative effects of the continuing minority government ownership on the performance of many Nigerian banks. Finally, our results complement aggregate indications of decreasing financial intermediation over the 1990s; banks that focused on investment in government bonds and non-lending activities enjoyed a relatively better performance.

Exploiting spatial and time variation, we find that banks geographically more exposed to lockdown measures experience an increase in loss provisions and non-performing loans. Exposures to the pandemic itself have a similar, but slightly weaker effect. We observe an increase in small business lending driven by government-guaranteed loans which seem to replace regular loans. Interestingly, lenders more exposed to lockdown measures rely more on government-guaranteed loans – even when controlling for borrower exposure. Finally, we observe a reduction in the number and average amount of syndicated loans for banks more affected by the pandemic, as well as an increase in interest spreads. These findings point to a negative impact of the pandemic on the supply side of finance, to previously unknown side effects of government support, and to the critical role of banks in channeling government support measures to small firms.

How different are Islamic banks from conventional banks? Does the recent crisis justify a closer look at the Sharia-compliant business model for banking? When comparing conventional and Islamic banks, controlling for time-variant country-fixed effects, we find few significant differences in business orientation. There is evidence however, that Islamic banks are less cost-effective, but have a higher intermediation ratio, higher asset quality and are better capitalized. We also find large cross-country variation in the differences between conventional and Islamic banks as well as across Islamic banks of different sizes. Furthermore, we find that Islamic banks are better capitalized, have higher asset quality and are less likely to disintermediate during crises. The better stock performance of listed Islamic banks during the recent crisis is also due to their higher capitalization and better asset quality.<br/><br/>Highlights<br/><br/>► We compare conventional and Islamic banks across 22 countries with both bank types. ► Islamic banks are less efficient, but intermediate more, especially during crises. ► During crises, Islamic banks are better capitalized, with lower loan losses. ► Recent stock performance of Islamic banks due to more capital and lower loan losses.

This paper analyzes the different options – liquidation, federalization, privatization and restructuring – that the Brazilian state governments had for the transformation of their state banks under the PROES in the late 1990s. Specifically, this paper explores (i) the factors behind the states’ choices and (ii) the effects of the transformation process on bank performance and efficiency. We find that states that were more dependent on federal transfers, whose banks were already under federal intervention and that established development agencies, were more likely to relinquish control over their banks and its transformation process. We find that privatized banks increased their performance, while restructured banks did not.