The Impact of Banking Crisis on the Income Distribution of Different Income Classes

The present study aimed to explore the impact of banking crisis on income distribution among various income classes in 60 world countries during 1990–2020. In this line, the Generalized Method of Moments (GMM) was used to estimate the six models with different dependent variables that depicted income percentiles for the wealthy, middle, and poor classes. The findings indicated that during a banking crisis, the income share of the wealthy class decreases, while the middle class and the bottom 20% experience an increase in their income share. Consequently, banking crisis could contribute to income equality in the countries under study. In addition to the variable of banking crisis, other variables such as financial development and financial openness could lead to income inequality, while the variables like the ratio of public expenditure to GDP, trade openness, GDP, and GDP squared would cause income distribution equality in the countries. The results suggest that governments support lower-income percentiles through subsidies, support packages, more job opportunities, and provision of low-interest loans, in a bid to mitigate the detrimental effects of banking crisis and reduce income inequality. Furthermore, governments should levy taxes, such as capital gains tax, on higher-income percentiles.