Template-Type: ReDIF-Paper 1.0
Title: Unequal and Unstable: Income Inequality and Bank Risk
Author-Name: Yuliyan Mitkov
Author-Email: ymitkov@uni-bonn.de
Author-Name: Ulrich Schüwer
Author-Email: schuewer@uni-bonn.de

Classification-JEL: G11, G21, G28, G51
Keywords: Inequality, Financial stability, Agency costs, Composition of credit, Banking competition

Abstract: We provide evidence that regions in the U.S. with higher income inequality tend to have a riskier banking sector. However, not all banks are more risky, as reflected in a higher dispersion of bank risk. We show how a model based on risk-shifting incentives where banks channel insured deposits into subprime loans can account for both findings. In equilibrium, a competition to risk-shift emerges, leading to a subprime lending boom in which loans to high-risk borrowers carry negative NPVs. Some banks engage in risk-shifting by lending to high-risk subprime borrowers, while the rest specialize in lending to low-risk prime borrowers.

Note: 
Length: 67
Creation-Date: 2021-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp261
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2021_261