The paper explores how prudential policies regulating the banking sector affect social metrics of sustainability such as economic inequality. According to the author the empirical analysis shows that prudential policies may alter the distribution of income and wealth. She disentangles possible transmission channels and puts forward a central causal mechanism for this relationship. Finally, some policy conclusions with a recommendation are presented.
FSC Research Workshop 2018
1 November 2018
Policy paper contribution
Source: Financial Risk and Stability Network
Katia Vozian, Research Assistant and PhD Candidate, Hanken School of Economics
The paper has been prepared as an accompanying contribution to the Financial Stability Conference 2018 held October 31 in Berlin and presented at the FSC Research Workshop the day after at TU Berlin. Researchers from various institutions and with different backgrounds had been invited to draft policy-oriented contributions on selected aspects of the conference to be presented at the workshop, published and enclosed in the conference report.
Prudential policies aiming for financial stability led to a significant growth of banking regulation in advanced economies in the past two decades. Concurrently, economic inequality continued rising in major advanced economies. Knowing that economic inequality may fuel financial crises, we explore how prudential policies regulating the banking sector affect social metrics of sustainability such as economic inequality. Our empirical analysis shows that prudential policies may alter the distribution of income and wealth. We disentangle possible transmission channels and put forward a central causal mechanism for this relationship. Finally, we argue that prudential policy evaluation processes need to account for unintended effects on economic inequality in a systematic way and by means of quantitative analytical methods.
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