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

Salvador Contreras, Amit Ghosh and Iftekhar Hasan

Journal of Banking & Finance, 2023, vol. 146, issue C

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.

Keywords: Bank failures; CRA small business lending; Income inequality; Small business formation; Net job creation (search for similar items in EconPapers)
JEL-codes: G21 G38 O15 R11 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:146:y:2023:i:c:s0378426622002709

DOI: 10.1016/j.jbankfin.2022.106690

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