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The redistributive effects of financial deregulation: wall street versus main street

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  • Anton Korinek
  • Jonathan Kreamer

Abstract

Financial regulation is often framed as a question of economic efficiency. This paper, by contrast, puts the distributive implications of financial regulation at center stage. We develop a formal model in which the financial sector benefits from financial risk-taking by earning greater expected returns. However, risk-taking also increases the incidence of large losses that lead to credit crunches and impose negative externalities on the real economy. We describe a Pareto frontier along which different levels of risk-taking map into different levels of welfare for the two parties, pitting Main Street against Wall Street. A regulator has to trade off efficiency in the financial sector, which is aided by deregulation, against efficiency in the real economy, which is aided by tighter regulation and a more stable supply of credit. We also show that financial innovation, asymmetric compensation schemes, concentration in the banking system, and bailout expectations enable or encourage greater risk-taking and allocate greater surplus to Wall Street at the expense of Main Street.

Suggested Citation

  • Anton Korinek & Jonathan Kreamer, 2014. "The redistributive effects of financial deregulation: wall street versus main street," BIS Working Papers 468, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:468
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    Cited by:

    1. Brei, Michael & Ferri, Giovanni & Gambacorta, Leonardo, 2018. "Financial structure and income inequality," CEPR Discussion Papers 13330, C.E.P.R. Discussion Papers.
    2. repec:rjr:romjef:v::y:2017:i:1:p:167-190 is not listed on IDEAS
    3. Oliver Denk & Boris Cournède, 2015. "Finance and income inequality in OECD countries," OECD Economics Department Working Papers 1224, OECD Publishing.
    4. Masciandaro, Donato & Volpicella, Alessio, 2016. "Macro prudential governance and central banks: Facts and drivers," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 101-119.
    5. Donato Masciandaro, 2018. "Central Banks And Macroprudential Policies: Economics And Politics," BAFFI CAREFIN Working Papers 1878, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    6. Boris Cournède & Oliver Denk & Peter Hoeller, 2015. "Finance and Inclusive Growth," OECD Economic Policy Papers 14, OECD Publishing.

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    Keywords

    financial regulation; distributive conflict; rent extraction; growth of the financial sector;

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