Bank Regulations and Income Inequality: Empirical Evidence

Abstract

This paper provides cross-country evidence that variations in bank regulatory policies result in differences in income distribution. In particular, the overall liberalization of banking systems decreases income inequality significantly. However, this effect becomes insignificant for countries with low levels of economic and institutional development and for market-based economies. Among liberalization policies, credit and interest rate controls have the most significant negative effect on inequality. Privatizations and liberalization of international capital flows also decrease income inequality; the latter also increases the income share of the relatively poor. In contrast, liberalization of securities markets increases income inequality substantially. These findings show that bank regulations have a significant effect on real economic outcomes as well as financial stability.

Finance and income inequality: A review and new evidence

“…In the presence of strong institutions, financial development may reduce inequality, allowing the poor to invest in human and physical capital (Law et al, 2014). A similar argument can be made for financial liberalization (Delis et al, 2014). 2 In recent decades there has been a global push to liberalize the financial sector.…”

“…A few studies examine the relationship between financial sector liberalization and income inequality using cross-country data (most of these studies use the database of Abiad Likewise, Delis et al (2014) conclude that higher liberalization of banking generally leads to narrower income distribution. Yet, they also find that this effect is not uniform across all liberalization policies, nor is it the same across countries with different levels of development or different types of financial environments.…”

“…We use the index that represents household income before taxes, as this shows inequality exclusive of fiscal policy. 12 As pointed out by Delis et al (2014) and Solt (2015), the SWIID database is the most comprehensive database and allows comparison across countries, because it standardizes income. 13 The Gini coefficient is derived from the Lorenz curve and ranges between 0 (perfect equality) and 100 (perfect inequality).…”

“…First, annual macroeconomic data are noisy, and this applies especially for data on income inequality (Delis et al, 2014). Second, the annual income inequality data in SWIID are imputed for years for which no information was available in the underlying databases (there are only infrequent measures of inequality for much of Africa, Latin America, and Asia).…”

“…For instance, Beck et al (2010) assess the impact of U.S. bank deregulation of the 1970s to the 1990s on the distribution of income and find that deregulation significantly reduces inequality by boosting incomes in the lower part of the income distribution but has little impact on incomes above the median. Likewise, some recent studies Delis et al, 2014;Li and Yu, 2014) based on crosscountry data report that financial liberalization reduces income inequality, but Jaumotte and Osuorio Buitron (2015) and Naceur and Zhang (2016) conclude that financial liberalization increases inequality (see section 2 for more details). Bumann and Lensink (2016) suggest that the impact of financial liberalization on inequality is conditioned by financial development.…”