Bank regulations and income inequality: Empirical evidence

Manthos, Delis and Iftekhar, Hasan and Pantelis, Kazakis (2010): 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, market discipline (private monitoring) and activity restrictions have an unambiguously positive and significant effect on income inequality and poverty, and this effect holds regardless of the level of economic and institutional development. In contrast, more stringent bank capital regulation and enhanced official supervisory power tend to reduce income inequality. However, this latter effect fades away for countries with low levels of economic and institutional development. We contend that these findings have new implications for the effects of bank regulations besides those related to their impact on financial stability.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank regulations; Income inequality; Cross-country panel data
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O15 - Human Resources ; Human Development ; Income Distribution ; Migration; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Aghion, P., Algan, Y., Cahuc, P., Shleiffer, A., 2009. Regulation and distrust. NBER Working Papers 14648, National Bureau of Economic Research.

Agoraki, M., Delis, M.D., Pasiouras, F., 2009. Regulations, competition and bank risk-taking in transition countries. Journal of Financial Stability, forthcoming.

Arellano, M., 2003. Panel Data Econometrics. Oxford University Press, Oxford.

Barlevy, G., Tsiddon, D., 2006. Earnings inequality and the business cycle. European Economic Review 50, 55-89.

Barth, J.R, Caprio, G. Jr., Levine, R., 2001. The regulation and supervision of bank around the world: A new database. In: Litan, R.E., Herring, R. (Eds.), Integrating Emerging Market Countries into the Global Financial System. Brookings-Wharton Papers in Financial Services, Brooking Institution Press, pp. 183-240.

Barth, J. R., Caprio, G. Jr., Levine, R., 2006. Rethinking bank regulation: Till angels govern. Cambridge University Press.

Barth, J.R., Caprio, G. Jr., Levine, R., 2008. Bank regulations are changing: But for better or worse? World Bank, Policy Research Working Paper 4646.

Barth, J.R., Lin, C., Ma, Y., Seade, J., Song, F.M., 2010. Do bank regulation, supervision and monitoring enhance or impede bank Efficiency? Available at SSRN: http://ssrn.com/abstract=1579352.

Beck, T., Demirgüç-Kunt, A., 2009. Financial institutions and markets across countries and over time: Data and analysis. World Bank Policy Research Working Paper No. 4943.

Beck, T., Demirgüç-Kunt, A., Levine, R., 2007. Finance, inequality and the poor. Journal of Economic Growth 12, 27-49.

Beck, T., Levine, R., Levkov, A., 2010. Big bad banks? The winners and losers from bank deregulation in the United States. Journal of Finance, 65 (5):1637-1667.

Blundell, R., Bond, S., 1998. Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics 87, 115-143.

Bond, S., 2002. Dynamic panel data models: A guide to micro data methods and practice. Centre for Microdata Methods and Practice Working Paper 09.

Bourguignon, F., 2005. Foreword. In: Laffont, J. (Ed.), Regulation and Development. Cambridge University Press, Cambridge, pp. xi-xiv.

Calderón, C., Chong, A., 2009. Labor market institutions and income inequality: An empirical exploration. Public Choice 138, 65-81.

Chong, A., Gradstein, M., 2007. Inequality and institutions. Review of Economics and Statistics 89, 454-465.

Clarke, G., Xu, L.C., Zou, H., 2002. Finance and income inequality: Test of alternative theories. Policy Research Working Paper Series 2984, The World Bank.

Cull, R., Senbet, L.W., Sorge, M., 2005. Deposit insurance and financial development. Journal of Money, Credit, and Banking 37, 43-82.

Deininger, K., Squire, L., 1996. A new data set measuring income inequality. World Bank Economic Review 10, 565-591.

Demirgüç-Kunt, A., Levine, R., 2009. Finance and inequality: Theory and evidence. NBER Working Papers, No. 15275.

Diamond, D.W., Dybvig, P.H., 1983. Bank runs, deposit insurance, and liquidity. Journal of Political Economy 91, 401-419.

Dollar, D., Kraay, A., 2002. Growth is good for the poor. Journal of Economic Growth 7, 195-225.

Driscoll, J.C., Kraay, A.C., 1998. Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics 80, 549-560.

Drukker, D.M., 2003. Testing for serial correlation in linear panel-data models. Stata Journal 3, 168-177.

Easterly, W., 2005. National policies and economic growth. In: Aghion, P., Darlauf, S. (Eds.), Handbook of Economic Growth, Elsevier.

Efron, B., Tibshirani, R.J., 1993. An Introduction to the Bootstrap. Chapman & Hall, New York.

Estache, A., Wren-Lewis, 2009. Toward a theory of regulation for developing countries: Following Jean-Jacques Laffont’s lead. Journal of Economic Literature 47, 729-770.

Evans, P., 1997. How fast do economies converge? Review of Economics and Statistics 79, 219-225.

Evans, P., 1998. Using panel data to evaluate growth theories. International Economic Review 39, 295-306.

Evans, P., Karras, G., 1996. Convergence revisited. Journal of Monetary Economics 37, 249-265.

Fortin, N.M., Lemieux, T., 1997. Institutional changes and rising wage inequality: Is there a linkage? Journal of Economic Perspectives 11, 75-96.

Fostel, A., Geanakoplos, J., 2008. Leverage cycle and the anxious economy. American Economic Review 98, 1211-1244.

Galor, O., Moav, O., 2004. From physical to human capital accumulation: Inequality and the process of development. Review of Economic Studies 71, 1001-1026.

Greenwood, J., Jovanovic, B., 1990. Financial development, growth, and the distribution of income. Journal of Political Economy 98, 1076-1107.

Laeven, L., Levine, R. 2009. Bank governance, regulation and risk taking. Journal of Financial Economics, 93, 259-275.

Laffont, J., 2005. Regulation and Development. Cambridge University Press, Cambridge.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., 2008. The economic consequences of legal origins. Journal of Economic Literature 46, 285-332.

Li, H., Squire, L., Zou, H., 1998. Explaining international and intertemporal variations in income inequality. Economic Journal 108, 26-43.

Quinn, D., Inclán, C., 1997. The origins of financial openness: A study of current and capital account liberalization. American Journal of Political Science 41, 771-813.

Repullo, R., Suarez, J., 2008. The procyclical effects of Basel II. CEPR Discussion Papers 6862.

Repullo, R., Suarez, J., 2009. The procyclical effects of bank capital regulation. Mimeo.

Roine, J., Vlachos, J., Waldenström, D., 2009. The long-run determinants of inequality: What can we learn from top income data? Journal of Public Economics 93, 974-988.

Roodman, D., 2009. How to do xtabond2: An introduction to difference and system GMM in Stata. Stata Journal 9, 86-136.

Shleifer, A., 2009. The age of Milton Friedman. Journal of Economic Literature 47, 123-135.