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Big Bad Banks?

By Harvard Law School Program on Corporate Governance

In the paper, Big Bad Banks? The Winners and Losers from Bank Deregulation in the United States, forthcoming in the Journal of Finance, my co-authors (Thorsten Beck and Alexey Levkov) and I assess the impact of bank deregulation on the distribution of income in the United States. Policymakers and economists disagree sharply about who wins and who loses from bank regulations. While some argue that the unregulated expansion of large banks will increase banking fees and reduce the economic opportunities of the poor, others hold that regulations restrict competition, protect monopolistic banks, and disproportionately help the rich. More generally, an influential political economy literature stresses that income distributional considerations, rather than efficiency considerations, frequently exert the dominant influence on bank regulations as discussed in Claessens and Perotti (2007) and Haber and Perotti (2008).

We find that removing restrictions on intrastate branching tightened the distribution of income by increasing incomes in the lower part of the income distribution while having little impact on incomes above the median. This finding is robust to an array of sensitivity analyses. We find no evidence that reverse causality drives the results. Moreover, the impact of deregulation on income distribution varies in a theoretically predictable manner across states with distinct economic, financial, and demographic characteristics at the time of deregulation. These findings support the view that branch regulation in the United States restricted competition, protected local banking monopolies, and impeded the economic opportunities of the relatively poor.

We also present evidence that the impact of branch deregulation on income inequality is an indirect one. There is no evidence that branch deregulation reduces inequality by boosting incomes of the self-employed or by increasing educational attainment. Rather, the effect of branch deregulation on income inequality is driven by a reduction in inequality between skilled and unskilled workers and a reduction in income inequality among unskilled worker. In addition, we show that the relative wages and the relative working hours of unskilled vis-à-vis skilled workers increased significantly after branch deregulation. This is consistent with branch deregulation leading to a greater demand for labor that falls disproportionally on lower-skilled workers who therefore see both their working hours and their wage rates increase.

The full paper is available for download here.

Full post as published by The Harvard Law School Corporate Governance Blog on May 07, 2010 (boomark / email).