This paper brings together the academic literature on individual and institutional investors in order to understand the nature of difficulties faced by them and set the background for the Special Issue. This introductory article and the papers in the Special Issue contribute to the debate on how to support individuals in their savings commitments and investment decision-making and whether and how institutional investors have fulfilled their role in supporting the development of the funded pension industry. There are three main conclusions: (i) individual investors are not ready for the role that has been assigned to them in the pension industry, (ii) institutional investors are a long way short of establishing healthy relational contracts and trustworthy relationships with their clients, and (iii) more effective regulation may be needed.

We compare default rates on conventional and Islamic loans using a comprehensive monthly dataset from Pakistan that follows more than 150,000 loans over the period 2006:04 to 2008:12. We find robust evidence that the default rate of Islamic loans is less than half the default rate of conventional loans. Islamic loans are less likely to default during Ramadan and in big cities if the share of votes to religious-political parties increases, suggesting that religion – either through individual piousness or network effects – may play a role in determining loan default.

Household borrowing in a foreign currency is a widespread phenomenon in Austria. Thirteen percent of Austrian households report their housing loan to be denominated in foreign currency, mostly Swiss franc. Yet, despite its importance, peculiar character, and acute policy concerns, we know little about the attitudes and characteristics of the households involved in this type of carry trade. We analyze a uniquely detailed financial wealth survey of 2556 Austrian households to sketch a comprehensive profile of the attitudes and characteristics of the households involved. We employ both univariate tests and multivariate multinomial logit models. The survey data suggest that risk seeking, affluent, and married households are more likely to take a housing loan in a foreign currency. Financially literate or high-income households are more likely to take a housing loan in general. These findings partially assuage policy concerns about household default risk on foreign-currency housing loans or household retirement security.

This paper provides evidence on how the new international regulation on Global Systemically Important Banks (G-SIBs) impacts the market value of large banks. We analyze the stock price reactions for the 300 largest banks from 52 countries across 12 relevant regulatory announcement and designation events. We observe that the new regulation negatively affects the value of the newly regulated banks, yet that the official designation of banks as “globally systemically important” itself has a partly offsetting positive impact. A cross-sectional analysis of the valuation effects with respect to, for example, government ownership of banks supports the view that the positive reaction to these designations can be attributed to a Too-Big-to-Fail (TBTF) perception by investors. The fact that these valuation effects emerge from a regulation specifically designed to reduce the costs and risks of Too-Big-to-Fail demonstrates the inherently paradoxical nature of the new regulation. These results further suggest that even though the individual components of the regulation have been effective, revealing the identities of G-SIBs eliminated ambiguity about the presence of government guarantees, and thereby may have run counter to the regulators’ intent to contain the effects of TBTF.

We study bank branching dynamics across 3,143 US counties and 26 years. During the last decade, banks closed their branches at an unprecedented rate. At its peak in 2009, there were 90,783 branches. By 2020, this number has fallen by 12 percent. While technological factors correlate with these branching dynamics, bank fragility and consolidation are also strongly associated with changes in the number of branches (and their openings and closures). Interestingly, technological capabilities to service customers, such as online banking, seem less tightly linked to de-branching than technological capabilities to process internal information. Our analysis shows that large banks rely on internal technology to shed branches, while small banks close branches when they are vulnerable or consolidate.

How do banks offer and price mortgages when an online platform enables them to reach regions where they have no branches? With unique data on responses from differently located banks to each applying household and a shift-share instrument for market concentration, we find banks to make more and cheaper offers to more concentrated local markets. We rationalize this as investments in lucrative market shares given customer switching costs. Banks also improve their inter-regional portfolio diversification with more attractive offers to regions more complementary to their home locales. Finally, banks` choices become increasingly automated, reducing their operating costs.

This paper investigates the effect of interbank market integration on small firm finance in the build-up to the 2007–2008 financial crisis. We use a comprehensive data set that contains contract terms on individual loans to 6047 firms across 14 European countries between 1998:01 and 2005:12. We account for the selection that arises in the loan request and approval process. Our findings imply that integration of interbank markets resulted in less stringent borrowing constraints and in substantially lower loan rates. The decrease was strongest in markets with competitive banking sectors. We also find that in the most rapidly integrating markets, firms became substantially overleveraged during the build-up to the crisis.

We study a representative dataset from Turkey that identifies firm–bank connections. Banks in Turkey differ not only in size and nationality, but also in ownership and orientation (non-Islamic versus Islamic)—resulting in at least six distinct bank types. We estimate a multinomial logit of the choice by the firm of bank type. We document a strong correspondence between bank type and firm characteristics that is not always the same as has been documented so far for US datasets. For example, small firms engage large rather than small banks. Young, large, multiple-bank, and industry-diversified firms, that are located in or close to Istanbul, team up with foreign banks. Islamic banks mainly deal with young, multiple-bank, industry-focused and transparent firms.

We examine whether the relationship between managerial risk-taking incentives and bank risk is sensitive to the underlying macroeconomic conditions. We find that risk-taking incentives provided to bank executives are associated with higher bank riskiness during economic downturns. We attribute this finding to the increase in moral hazard during macroeconomic downturns when the perceived probability of future bailouts and government guarantees rises. This association is particularly strong for larger banks, banks that maintain lower capital ratios and banks that are managed by more powerful Chief Executive Officers (CEOs). Our findings highlight the importance of the interaction between managerial incentives and the macroeconomic environment. Boards and regulators may find it useful to consider the countercyclical nature of the relationship between risk-taking incentives and bank riskiness when designing managerial compensation.

We model two dimensions of bank globalization – bank nationality (a bank from the firm’s host nation, its home nation, or a third nation) and bank reach (a global, regional, or local bank) using a two-stage nested multinomial logit model. Our data set includes over 2000 foreign affiliates of multinational corporations operating in 20 European nations and over 250 banks that serve them. We find that these firms frequently use host nation banks for cash management services, and that bank reach may be strongly influenced by this choice of bank nationality. Our results suggest limits to the degree of future bank globalization.