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The effect of bank failures on small business loans and income inequality

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  • Contreras, Salvador
  • Ghosh, Amit
  • Hasan, Iftekhar

Abstract

Using variation in the timing and location of branches of failed banks we analyze its effect on income inequality. Employing a difference-in-differences specification we find that bank failures increased the GINI by 0.3 units (or 0.7%). We show that the rise in inequality is due to a decrease in the incomes of the poor that outpaces declines of the rest. We further show that individuals with lower levels of education exhibit a relatively greater decline in real wages and weekly hours worked. Exploring channels of transmission, we find income inequality is explained by a general decline in small business loans. This in turn reduces net new small business formation and their job creation capacity, a sector that hires a substantial share of low-income earners.

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  • Contreras, Salvador & Ghosh, Amit & Hasan, Iftekhar, 2023. "The effect of bank failures on small business loans and income inequality," Journal of Banking & Finance, Elsevier, vol. 146(C).
    • Handle: RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002709
    DOI: 10.1016/j.jbankfin.2022.106690
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    More about this item

    Keywords

    Bank failures; CRA small business lending; Income inequality; Small business formation; Net job creation;
    All these keywords.

    JEL classification:

    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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