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Bank Regulation and Income Distribution Evidence from Branch Deregulation

Bank Regulation and Income Distribution Evidence from Branch Deregulation. Thorsten Beck, Ross Levine and Alexey Levkov. Finance and income inequality – cross-country. Motivation. Does banking sector development benefit the rich or the poor? Greenwood and Jovanovic (1993)

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Bank Regulation and Income Distribution Evidence from Branch Deregulation

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  1. Bank Regulation and Income DistributionEvidence from Branch Deregulation Thorsten Beck, Ross Levine and Alexey Levkov

  2. Finance and income inequality – cross-country

  3. Motivation • Does banking sector development benefit the rich or the poor? • Greenwood and Jovanovic (1993) • Galor and Zeira (1993), Galor and Moav (2004) • Do large banks help the rich and wealthy? • Extensive restrictions on banks in most of U.S. history • Debate on bank regulation often led in terms of income distribution • We use branching deregulation episode to assess impact of financial liberalization in income inequality

  4. Branching restrictions • Until mid-1970s most states restricted the ability of banks to freely branch within states and across states, reducing competition • Small banks with local monopolies (Flannery, 1984) • Created rents and lobby groups to defend them (White, 1982) • Technological progress undermined these restrictions (Kroszner and Strahan, 1999) • ATMs • Checkable money market mutual funds • Communication technology improvements weakened geographic link between bank and client

  5. Branch deregulation • From mid-1970s until 1994 (Riegle-Neal Act), most states did away within intra- and inter-state branch restrictions • Growth accelerated (Jayaratne and Strahan, 1996) • Bank efficiency improved (Jayaratne and Strahan, 1998) • Rate of new incorporations increased (Black and Strahan, 2002) • Volatility decreased (Morgan, Rime and Strahan, 2004)

  6. Timing and effects National technological changes weakens local branch monopoly State Deregulation Time

  7. Our paper • Did branch deregulation result in an increase or decrease in income inequality as measured by Gini? • Cross-country evidence: • Beck, Demirguc-Kunt and Levine (2007): Financial development is associated with faster reductions in Gini • See also Clarke, Xu and Zhou (2007) • Debate on bank restrictions in general: • Political debate on bank regulation has been to a large extent about income distribution • Do we have to restrain banks from growing too big in order to protect the poor?

  8. Our econometric test Difference-in-difference estimation Log(Gini)i,t = ai + bt + gDeregulationi,t + dXi,t + ei,t • X = State GSP, Govt. taxes/personal income, govt. expenditure/personal income, college graduates • Cluster on state-level • Drop observation in year of deregulation • Little concerns of endogeneity • Deregulation at different times allows to exploit state-time-panel • Single policy change - reduce identification and comparability problems often associated with cross-country

  9. Data – income distribution • Current Population Survey (CPS) • Detailed information on different household income sources • Compute Gini across states for each year over 1977 to 2003 • Compute for total household, total individual income, wage and salary income (male and female), proprietor income

  10. Data – branch deregulation • Focus on intra-state branching deregulation • Allow bank holding companies to convert subsidiaries into branches; allow de-novo branching • Data on 48 states and DC • Drop Delaware and South Dakota (credit cards) • Most states deregulated during sample period • 15 states deregulated before 1977 • Arkansas, Iowa and Minnesota were the last to deregulate

  11. Branch Deregulation and Income Distribution – Statistical effect

  12. Timing and effects National technological changes weakens local branch monopoly State Deregulation Time

  13. Branch Deregulation and Income Distribution – Economic effect • Coefficient: 0.013 • Within-state, within-time standard deviation of log of Gini 0.034 • Branching deregulation explains 40% of variation of log Gini relative to state and year averages.

  14. Branch Deregulation and Income Distribution by Type of Income

  15. Conclusions • Branching deregulation • Increased growth • Reduced income inequality Pro-poor • Strongest effect among female wage and salary earners and proprietors • Effect of finance on income inequality seems to go both through labor market and access to credit

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