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The impact of risk-based capital rules for international lending on income inequality: Global evidence

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  • Hasan, Iftekhar
  • Hassan, Gazi
  • Kim, Suk-Joong
  • Wu, Eliza
Abstract
This paper investigates the impact of international bank flows from G10 lender countries on income inequality in 74 borrower countries over 1999–2013. Specifically, we examine the role of international bank flows contingent upon the Basel 2 capital regulation and the level of financial market development in the borrower countries. First, we find that improvements in the borrower country risk weights due to rating upgrades under the Basel 2 framework significantly increase bank flows, leading to improvements in income inequality. Second, we find that the level of financial market development is also important. We report that a well-functioning financial market helps the poor access credit and thereby reduces inequality. Moreover, we employ threshold estimations to identify the thresholds for each of the financial development measures that borrower countries need to reach before realizing the potential reductions in income inequality from international bank financing.

Suggested Citation

  • Hasan, Iftekhar & Hassan, Gazi & Kim, Suk-Joong & Wu, Eliza, 2021. "The impact of risk-based capital rules for international lending on income inequality: Global evidence," Economic Modelling, Elsevier, vol. 98(C), pages 136-153.
    • Handle: RePEc:eee:ecmode:v:98:y:2021:i:c:p:136-153
    DOI: 10.1016/j.econmod.2021.01.003
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    More about this item

    Keywords

    Cross-border banking; Basel 2 accord; Income inequality; Financial development;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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