Causes of banking crises: testing inequality and financial deregulation directly

I perform an empirical analysis to investigate the direct effect of income inequality and financial deregulation on the occurrence of systemic banking crises based on a panel of 133 countries over the period 1970–2018. Differently from earlier empirical studies, this study focuses both on income inequality and financial deregulation levels. Findings based on a multivariate logit model to estimate the probability of systemic banking crisis do not provide any reliable evidence for the existence of a direct relationship between the various measures of inequality and the occurrence of banking crises. I also find that there is no direct link between financial liberalization and the occurrence of banking crises. Furthermore, my analysis shows that income inequality and financial deregulation do not act together to directly impact the likelihood of banking crises. However, this study provides evidence that the reduction of banking capital regulations and prudential supervision may increase the likelihood of banking crisis in the short run. Additionally, the results of this study support the previous findings in the literature that the level of private credit is the most robust predictor of the systemic banking crises.