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Bank Deregulation and Income Distribution

Bank Deregulation and Income Distribution. Discussion by: Philip E. Strahan Boston College March 2007. What does banking deregulation do?. Effects on banking sector Lowers entry barriers & more competition Weeding out of inefficient banks Increases M&A rate

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Bank Deregulation and Income Distribution

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  1. Bank Deregulation and Income Distribution Discussion by: Philip E. Strahan Boston College March 2007

  2. What does banking deregulation do? • Effects on banking sector • Lowers entry barriers & more competition • Weeding out of inefficient banks • Increases M&A rate • Reduces presence of small banks • More integrated markets regionally & nationally • Effects on the real economy • Faster overall growth • More entry and more small firms (more competition in non-financial sector) • Less idiosyncratic economic volatility / better risk sharing

  3. Why would deregulation affect income distribution? • More competition  less labor-market discrimination • Black & Strahan (2001) report evidence in banking • Implication: Minorities, women may benefit most from banking deregulation, so lower income inequality • More creation of new firms • Not clear how growth or business fluctuations affects income distribution • In general, paper needs more discussion of theory or channels through which reform might reduce inequality

  4. This paper:US deregulation lowered income inequality • Wages increase more for women than men after reform • Consistent with competition / discrimination channel • Gini coefficient falls after reform • More for women. Why? • More for proprietor’s income

  5. Extension 1: More details on banking competition • Local market concentration • Exploit variation at MSA level • Interact with deregulation indicators • Other exogenous changes in concentration from large-bank mergers • Germaise & Moskowitz (2006) • Branching v. interstate banking reform • Unit banking v. limited branching

  6. Extension 2: Look at other changes in banking • Small bank market presence falls sharply after deregulation • Efficiency v. market power • What matters? • Mergers & Acquisitions

  7. Extension 3: Explore Dynamics • How long for income distribution to change? • Does income distribution change before deregulation? After? Lags • Important to understand causality

  8. Extension 4:What happens along different points in the wage distribution? • 25th, median, 75th percentiles? • Who loses (besides small bankers)? • Age, sex, race, education • Do young benefit relative to old? • Do minorities benefit relative to non-minorities? • College v. non-college • Industry effects • Bigger effects where finance matters more (a la Rajan & Zingales?)

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