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

This paper examines how microprudential policy affects income inequality, and whether and how the effect of macroprudential policy on income inequality depends on the stance of microprudential policy. The dataset covers 70 countries over the period 1996 - 2013. Applying the system GMM estimation method, the analysis provides evidence that tighter microprudential policy leads to a reduction in income inequality as measured by the Gini coefficient. Nonetheless, the effect of an overall tightening of microprudential policy disappears in countries with low levels of economic development. Among the inspected individual microprudential policies, the power and independence of supervisory authorities have the greatest effect on income inequality. In addition, the results suggest that macroprudential policy tightening is effective in reducing income inequality under a strong microprudential policy framework, while the effect is reversed under a weak microprudential policy scheme. Moreover, the effects of macroprudential policy tightening on income inequality are amplified when implemented within a strict microprudential policy environment. This paper contributes to the growing literature on the spillover effects of banking regulation and supervision and on the relationship between financial sector policies and income inequality.