M-RCBG Associate Working Paper No. 221
Banks, economic performance and inequality across US counties
Using a novel set of data on banking characteristics across US counties, we present evidence on the relationship between banking, local economic performance, and inequality in the US over the last 30 years. Clear links emerge between bank performance, as measured by bank penetration and competition, profitability, risk, asset quality and business models, and local economic performance. Our estimates suggest that banks may have played a role in the recent increase in spatial inequality across US regions. More in detail, bank penetration helps economic performance but is broadly neutral with regard to inequality. The presence of community banks helps reduce spatial and personal inequality. More profitable and less risky banks improve economic performance, but their effect on inequality (spatial and personal) is more nuanced. There is evidence that the increase in bank profitability, prior to the GFC and again recently, may have contributed to higher spatial inequality. By contrast, in the GFC years, banks seem to have mitigated the increase in spatial inequality due to other factors. These results, especially if corroborated by other analyses, suggest that banking regulation may be part of a menu of space-based policies designed to mitigate inequality in the US.