The recent global financial crisis reignited the debate on the ownership structure of the banking sector and its consequences for financial intermediation. Some have pointed to the presence of foreign banks in developing countries as a key mechanism for transmitting the 2008-2009 crisis from advanced to developing countries (e.g., IMF, 2009). At the same time, developing countries like Brazil, China, and India, where government-owned banks are systemically important, recovered quickly from the crisis, generating interest in the potential mitigating role that these banks can play during periods of financial distress. 
How do financial systems around the world stack up? Which one has the highest number of bank accounts per capita? Where in the world do we find the lowest interest rate spreads, and where are they the highest? Which country has the most active stock market? Has competition among banks increased or decreased in recent years? Are financial institutions and financial markets in developed economies more or less stable than those in developing ones? Answers to these and many other interesting questions can be found in the Global Financial Development Database, accompanying the 2013 Global Financial Development Report. Both the database and the report were published earlier this month.
The U.S. Federal Deposit Insurance Corp. released a study yesterday reporting that 17 million adults – or 7% of the adult population - live in an unbanked household. In fact, because they use the household as the unit of measurement, the FDIC considers this to be a lower-bound estimate of the number of unbanked adults living in America. The finding is therefore consistent with the World Bank Development Research Group’s Global Findex database which finds that 12% of American adults are unbanked. Both data sources consider an adult to be unbanked if they do not have an account at a formal financial institution.
The failure of the investment banking giant Lehman Brothers on September 15, 2008 marked the onset of the largest global economic meltdown since the Great Depression. The crisis has prompted many people to reassess state interventions in financial systems, from regulation and supervision of financial institutions and markets, to competition policy, to state guarantees and state ownership of banks, and to enhancements in financial infrastructure. But the crisis does not necessarily negate the considerable body of evidence on these topics accumulated over the past few decades. It is important to use the crisis experience to examine what went wrong and how to fix it. This is the motivation of the World Bank’s Global Financial Development Report, released this week, on the fourth anniversary of the Lehman failure.
There is more than one side to every story. Bank lending to small and medium enterprises (SMEs) is not an exception. On one side are SMEs, their expansion plans, and their needs for financing. On the other side are banks and their policies. Empirical analyses of financing to SMEs typically focus on the firms’ side of the story. Surveys gather information from firms and try to understand their sources of financing, if they are credit-constrained, or even if they rule themselves out from applying for bank loans because they believe they will be turned down by banks. Those surveys also collect detailed information on firm characteristics, e.g. the date the firm started operations, the owner’s gender, and the reason why the business was started. In other words, surveys on SME financing focus on consumers with great detail. Surveys rarely—if ever—focus on suppliers.
Financial literacy programs are fast becoming a key ingredient in financial policy reform worldwide. Yet, what is financial literacy exactly and what do we know of its effectiveness? In a new paper, Lisa Xu and I summarize existing evidence on both measurement and impact of financial literacy and provide lessons for policymakers and guidance for researchers on future work in this area.
While the working paper provides a detailed and practitioner-oriented overview of the recent research, drawing on what we’ve learned from surveys, impact evaluations, and other empirical work, I want to use this blog space to focus on lessons for the way forward.
Approximately 50 percent of the global adult population - or 2.5 billion people - are excluded from the formal financial system. Who are the unbanked? The vast majority of these adults are concentrated in the developing world - only a third of South Asians, a quarter of Sub-Saharan Africans, and less than a fifth of Middle-Easterners and North Africans have an account at a formal financial institution (Demirguc-Kunt & Klapper, 2012). Why are these people unbanked? A shortage of money, excessive cost, distance to a bank, and documentation requirements are reported by the unbanked themselves as the main barriers to financial access.
In the aftermath of the global financial crisis, there has been much criticism of compensation practices at banks. Although much of this debate has focused on executive compensation (see the recent debate on this blog), there is a growing recognition that non-equity incentives for loan officers and other employees at the lower tiers of a bank’s corporate hierarchy may share some of the blame — volume incentives for mortgage brokers in the United States that rewarded high-risk lending at wildly unsustainable terms are a particularly striking case in point.
The impact of bank competition on financial markets and firms is an important topic of concern for policymakers and researchers alike. Interest in this topic intensified during the recent global financial crisis as researchers and policymakers questioned whether high competition was partly to blame.1 Those against bank competition make two main arguments. First, competition may lead to risky lending practices as financial institutions search for higher margins. The increase in subprime lending is an example of such behavior prior to the recent crisis. Second, higher competition may erode banks’ profit margins and leave them with insufficient capital cushions, something that also played a role in the recent crisis. On the other hand, those in favor of competition argue that it can improve access to finance, especially for small and medium enterprises, and that any negative effects on stability are better addressed by proper regulation and supervision of financial institutions.
The past two decades have seen a large increase in foreign bank entry across the globe, a trend that has been especially strong in the transition countries of Central and Eastern Europe and in Latin America. The effects of foreign bank participation on lending to small and medium enterprises (SMEs) have been a controversial issue among academics and policy makers alike. Critical issues in this debate have been different clienteles and lending techniques of domestic and foreign banks. Most prominently, Mian (2006) shows that clients of foreign banks in Pakistan are of larger size, more transparent, in larger cities and more likely to be foreign-owned, inferring from that the lending techniques foreign banks apply. This analysis, however, confounds two effects – differences in clientele and differences in lending techniques. Do foreign banks use different lending techniques because they have different clienteles or do they use different lending techniques even for the same customers of domestic banks? In recent work with my Tilburg colleagues Vasso Ioannidou and Larissa Schäfer, we use data from the Bolivian credit registry and focus on a sample of firms that borrow from domestic and foreign banks in the same month to isolate the effects of different lending techniques of banks of different ownership (Beck, Ioannidou and Schäfer, 2012).