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 investigate the determinants of multiple-bank relationships using a new data set comprising 1079 firms across 20 European countries. We document large cross-country variation in the average number of bank relationships per firm, uncovering a richness in European financial systems that extends beyond the standard description of being “bank-dominated”. After controlling for a variety of firm-specific characteristics, we find that firms maintain more bank relationships, on average, in countries with inefficient judicial systems and poor enforcement of creditor rights. Firms also maintain more relationships in countries with unconcentrated but stable banking systems and active public bond markets. Journal of Economic Literature Classification Numbers: G21, C41.

We analyze how time-varying bank-specific capital requirements affect bank lending to the non-financial corporate sector as well as banks' balance sheet adjustments. To do so, we relate Pillar 2 capital requirements to a comprehensive corporate credit register coupled with bank and firm balance sheet data. Our analysis consists of three components. First, we investigate how capital requirements affect the supply of bank credit to the corporate sector, both on the intensive and extensive margin, as well as for different types of credit. Subsequently, we document how bank and firm characteristics as well as the monetary policy stance impact the relationship between bank capital requirements and the supply of credit. Finally, we examine how time-varying bank-specific capital requirements affect banks' balance sheet composition.

In this paper, we investigate how firms choose their banks. We focus on the role played by the decision factors, the decision maker and the decision process in determining firm–bank relationships. We have access to a unique survey that was run by a major bank in the Czech Republic. We find that firms that consider bank reputation to be an important decision factor, have fewer bank relationships and are less likely to reduce the number or quantity of services taken from their banks. Firms that emphasize the price of bank services are more likely to end relationships or to reduce services. Interestingly, the identity of the corporate decision maker determines the number of bank relationships. A Chief Financial Officer deciding on her own will opt for a lower number of banks than a committee of board members.

Bank bailouts are not “one-shot” events, as often portrayed, but rather dynamic processes with phases over time. Regulators “catch” financially distressed banks and provide aid, “restrict” these banks’ activities for ex ante unknown lengths of time, and then “release” the banks from the restrictions when capital ratios reach sufficiently healthy levels. This catch-restrict-release bailout approach is employed globally and applies to both major bailout methods capital injections (CIs) and debt guarantees (DGs). We model how a regulator that maximizes a social welfare function that includes the value of the bank and expected costs to the rest of the financial system and the real economy of its default might design and implement catch-restrict-release and test model predictions. Our data laboratory includes multiple EU nations over the financially stressful 2008-2014 period when many bailouts occurred. Findings suggest regulators bail out banks in a qualitatively consistent fashion with maximizing the social welfare function, yielding policy implications and directions for future research.

We examine the firm- and country-level determinants of foreign currency borrowing by small firms, using information on the most recent loan extended to 3101 firms in 25 transition countries between 2002 and 2005. Our results suggest that foreign currency borrowing is much stronger related to firm-level foreign currency revenues than it is to country-level interest rate differentials. Supporting the conclusion that carry-trade behavior is not the key driver of foreign currency borrowing in our sample we find no evidence that firm-level indicators of distress costs or financial transparency affect loan currency denomination. Overall, our findings suggest that retail clients which do take foreign currency loans are better equipped to bear the corresponding currency risks than is commonly thought. Policy makers should therefore take a closer look at the characteristics of borrowers before implementing regulations which are aimed at curbing foreign currency loans.

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.

We investigate whether banks’ initial responses during the first wave of the COVID-19 pandemic in supporting their customers, communities, and governments were perceived as value-enhancing by investors. Using a unique responsible banking measure for a sample of the largest US and European commercial banks, we find a negative relationship between responsible bank behavior and stock market performance, particularly in the first wave of the pandemic. We also find that riskier banks were affected more negatively if they behaved responsibly. Overall, our findings show that banks’ responsible behavior during a crisis reduces, or at best is not relevant to, shareholder value.

What are the benefits of access to the bond market for unlisted firms, and how does it affect their bank lending conditions? Using a regulatory reform that allowed unlisted firms to issue minibonds, we address these questions comparing new bank loans to issuers with concurrent loans to matched non-issuers. After the first minibond issuance, issuers obtain lower interest rates on bank loans of similar maturity, largely reflecting a shift in the seniority structure of corporate debt, and reduce the use of bank loans while increasing their total financial debt. They also increase turnover, total and fixed assets, particularly intangible assets.