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

Anton Korinek and Jonathan Kreamer

No 468, BIS Working Papers from Bank for International Settlements

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.

Keywords: financial regulation; distributive conflict; rent extraction; growth of the financial sector (search for similar items in EconPapers)
Pages: 39 pages
Date: 2014-10
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:468

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