Does Bank Regulation and Supervision Impact Income Inequality? Cross-Country Evidence

• Název práce v češtině: Ovlivňuje bankovní dohled a regulace příjmovou nerovnost? Evidence z mezinárodního vzorku zemí
• Název v anglickém jazyce: Does Bank Regulation and Supervision Impact Income Inequality? Cross-Country Evidence
• Klíčová slova: Příjmová nerovnost, Mikroobezřetnostní politika, Makroobezřetnostní politika, Prevence krizí, Panelová data
• Klíčová slova anglicky: Income Inequality, Microprudential Policy, Macroprudential Policy, Crisis Prevention, Panel Data
• Akademický rok vypsání: 2022/2023
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. PhDr. Adam Geršl, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 05.06.2023
• Datum zadání: 05.06.2023
• Datum a čas obhajoby: 19.06.2024 09:00
• Místo konání obhajoby: Opletalova, O105, místnost č. 105
• Datum odevzdání elektronické podoby: 24.04.2024
• Datum proběhlé obhajoby: 19.06.2024
• Oponenti: prof. PhDr. Petr Teplý, Ph.D.

Zásady pro vypracování

Financial sector policies, such as bank regulation and supervision, have significantly evolved over the past 30 years. The Basel regulatory framework has moved from the rather simple Basel I in the early 1990s to the more complex Basel II in the 2000s up to the current Basel III that has been designed after the Global Financial Crisis 2008/2009 and implemented from 2010 on, in parallel with the newly established macroprudential policy that complements the traditional microprudential focus of the bank regulation. Also, in the conduct of supervision, there have been many improvements and changes over the same years, with most countries moving from compliance-based supervision to more risk-based supervision, in line with the Pillar 2 idea of the Basel II to deepen the supervisory dialogue between the regulator and the banks. Nonetheless, despite the acknowledged benefits of safeguarding the stability of the financial system and individual institutions, there may be unintended consequences of the continuous reforms in the regulatory and supervisory framework in terms of negative spillovers to the real economy both in the overall economic growth and the level of income inequality (Malovaná et al., 2023; Frost & van Stralen, 2018).
Changes in financial sector policies can both increase and decrease income inequality. Tighter loan eligibility criteria or more stringent capital regulation can make banks focus on richer households and large firms, decreasing the access to finance for poorer households and smaller firms and potentially increasing income inequality (Frost & van Stralen, 2018). Financial liberalization and looser policies could increase the income of the lower quantiles of the income distribution while having a negligible impact on income above the 50th quantile (Beck et al., 2010), decreasing income inequality. On the other hand, tighter policies would prevent excesses in financial intermediation and the subsequent financial crises, decreasing income inequality (as during crises, poorer households typically suffer more). Moreover, various regulatory policies can have diverse objectives, leading to potentially contrasting or contradictory effects on income distribution (Delis et al., 2014). Banking regulation and supervision still vary widely across countries in many distinct dimensions (Barth et al., 2013), which provides an opportunity to explore the impact of both macroprudential and microprudential measures on income distribution.
Existing literature investigates primarily the link between macroprudential policy and income and wealth inequality, while research on the relationship between microprudential regulation/supervision (or financial liberalization) and income inequality is scarce. Frost and van Stralen (2018) use country-level data for 2000-2013 to seek whether and how are macroprudential policy tools related to measures of inequality. They suggest that the macroprudential policy tools are positively associated with income inequality. Malovaná, Janků, and Hodula (2023) identify two channels through which macroprudential policy affects income inequality - the prevention channel and the crisis mitigation channel which have different impacts on income inequality. Instead of country-level data, some papers inspect bank-level and household-level data, mainly the Household Finance and Consumption Survey, and China Household Finance Survey (Carpantier et al., 2018; Georescu & Martín, 2021; Park & Kim, 2023; Zhai et al, 2023).
With respect to microprudential policies, using state-level data for 1997-2005, Delis et al. (2014) estimate a negative relationship between income inequality and credit and interest rate controls whereas a positive association with the liberalization of securities markets. They conclude that the overall effect of banking regulation is lower income inequality and narrower income distribution. On the contrary, the results of Agnello et al. (2012) and De Haan et al. (2017) imply a positive relationship between income inequality and financial liberalization.

Seznam odborné literatury

Abiad, A., Detragiache, E., & Tressel, T. (2010). A new database of financial reforms. IMF Staff Papers, 57(2), 281-302.
Agnello, L., Mallick, S. K., & Sousa, R. M. (2012). Financial reforms and income inequality. Economics Letters, 116(3), 583-587.
Anginer, D., Bertay, A. C., Cull, R., Demirgüç-Kunt, A., & Mare, D. S. (2019). Bank regulation and supervision ten years after the global financial crisis. World Bank Policy Research Working Paper, (9044).
Barth, J. R., Caprio Jr, G., & Levine, R. (2013). Bank regulation and supervision in 180 countries from 1999 to 2011. Journal of Financial Economic Policy, 5(2), 111-219.
Beck, T., Levine, R., & Levkov, A. (2010). Big bad banks? The winners and losers from bank deregulation in the United States. The Journal of Finance, 65(5), 1637-1667.
Blau, B. M. (2018). Income inequality, poverty, and the liquidity of stock markets. Journal of Development Economics, 130, 113-126.
Bodea, C., Houle, C., & Kim, H. (2021). Do financial crises increase income inequality?. World Development, 147, 105635.
Brei, M., Ferri, G., & Gambacorta, L. (2018). Financial structure and income inequality.
Bumann, S., & Lensink, R. (2016). Capital account liberalization and income inequality. Journal of International Money and Finance, 61, 143-162.
Carpantier, J. F., Olivera, J., & Van Kerm, P. (2018). Macroprudential policy and household wealth inequality. Journal of International Money and Finance, 85, 262-277.
Christopoulos, D., & McAdam, P. (2017). Do financial reforms help stabilize inequality?. Journal of International Money and Finance, 70, 45-61.
Claessens, S., & Perotti, E. (2007). Finance and inequality: Channels and evidence. Journal of comparative Economics, 35(4), 748-773.
Colciago, A., Samarina, A., & de Haan, J. (2019). Central bank policies and income and wealth inequality: A survey. Journal of Economic Surveys, 33(4), 1199-1231.
De Haan, J., & Sturm, J. E. (2017). Finance and income inequality: A review and new evidence. European Journal of Political Economy, 50, 171-195.
Delis, M. D., Hasan, I., & Kazakis, P. (2014). Bank regulations and income inequality: Empirical evidence. Review of Finance, 18(5), 1811-1846.
El Said, A., Emara, N., & Pearlman, J. (2019). On the Impact of Financial Inclusion on Financial Stability and Inequality: The Role of Macroprudential Policies. Department of Economics, Discussion Paper Series, (20/06).
Frost, J., & van Stralen, R. (2018). Macroprudential policy and income inequality. Journal of International Money and Finance, 85, 278-290.
Georgescu, O. M., & Martín, D. V. (2021). Do macroprudential measures increase inequality? Evidence from the Euro area household survey.
Malovana, S., Janku, J., & Hodula, M. (2023). Macroprudential Policy and Income Inequality: The Trade-off Between Crisis Prevention and Credit Redistribution (No. 2023/3).
Oliveira, S. L. G. (2021). (Un) conventional Monetary Policy, Macroprudential Policy, and Inequality.
Omori, S. (2022). Introducing the Revised and Updated Financial Reform Database. Journal of Financial Regulation, 8(2), 230-240.
Park, S., & Kim, Y. H. (2023). The impact of macroprudential policy on inequality and implications for inclusive financial stability. Journal of Banking & Finance, 146, 106716.
Solt, F. (2016). The standardized world income inequality database. Social science quarterly, 97(5), 1267-1281.
Zhai, K., Zhao, G., & Li, D. (2023). Macroprudential policy and household wealth inequality: Evidence from China. Journal of Asian Economics, 86, 101608.

Předběžná náplň práce

Hypotheses
Hypothesis#1: Tighter microprudential policies are associated with higher income inequality.
Hypothesis#2: The impact of microprudential policies on income inequality depends on the stance of macroprudential and monetary policy.
Hypothesis#3: The effects of microprudential policies vary across different regulatory instruments.

Methodology
In the thesis, the effects of the relationship between income inequality and the stringency of bank regulation and supervision are estimated. Using country-level data, both the individual effects of macroprudential and microprudential policy tools and their aggregate effect (capturing the interaction) will be examined. We will also control for other factors and zoom in on an additional potential interaction, namely with monetary policy. Our analysis will also show what concrete policy areas and tools are associated with income inequality and in which direction.
In the research analysis, we will consider using fixed effects or GMM to account for potential endogeneity as in Delis et al. (2014). Given that macroeconomic data are noisy, the levels and multiple-year averages are going to be considered (Delis et al., 2014; De Haan & Sturm, 2017).
The measure of income inequality is the Gini coefficient from the Standardized World Income Inequality Database (SWIID) including Gini coefficients before and after government redistribution. The SWIID enhances the comprehensibility and comparability of Gini coefficients by standardizing consumption and wage income, making it the most comprehensive source for such data (Solt, 2016). Analogously, the effects of bank regulation and supervision stringency (microprudential policy tools) will be added to the model in two ways - either as an index representing the financial liberalization based on the Revised and Updated Financial Reform Database by Omori (2023) widening the original dataset by Abiad et al. (2010) or from the Bank Regulation and Supervision Survey conducted by the World Bank. The macroprudential policy measures will be included in the regression in the form of an index based on the integrated Macroprudential Policy Database (iMaPP) available from the International Monetary Fund.
Other control variables will be included in the model to capture their known effect on income inequality – macro-financial variables, monetary policy stance, demographic variables, and trade and fiscal policy factors. These controls will include a dummy variable capturing banking crises, government expenditures on cash transfers and subsidies, average years of schooling as a proxy for human capital, unemployment, domestic credit to the private sector to GDP, GDP per capita, inflation, and others. I will collect them from public databases of Our World in Data (OWID), World Bank, United Nations, UNESCO Institute for Statistics (UIS), and International Monetary Fund.
The analysis will further distinguish between advanced economies and emerging and developing economies. Finally, since the dataset will be composed based on numerous data sources, the research will try to use the longest possible panel of data to capture the effect on income inequality in an optimal manner.

Expected Contribution
This thesis is going to contribute to the developing area of research on the effect of financial sector policies on income inequality, with a focus on microprudential regulation and supervision of banks. Specifically, there are only few studies that investigate the impact of other than macroprudential policy tools on inequality, and the existing literature on microprudential policies uses aggregate financial liberalization indexes from the Financial Reform Database constructed by Abiad et al. (2010) covering the years 1973-2005 and 91 economies (Agnello et al., 2012; Delis et al., 2014; De Haan et al., 2017). This thesis will use the extended database from the Revised and Updated Financial Reform Database by Sawa Omori ending in 2013, covering 100 economies and including decomposed bank regulation indexes on three levels which enables the identification of channels of the spillover effect of the microprudential measures on income inequality (Omori, 2022). Also, the World Bank Survey data on bank regulation and supervision will be utilized. To my knowledge, this thesis would be the first to combine these explore these two data sources to explore the impact of microprudential policies on inequality. The interaction effects between microprudential and macroprudential policy tools, and potentially also with monetary policy, on income inequality might also be investigated. The results of my thesis will offer new insights into the unintended effects of bank regulation and supervision on the real economy and could be interesting for financial regulators, central bankers, and other policymakers.