The effect of Bank lending on Income inequality in Europe: Evidence from disaggregated credit channels.

Using a panel of 25 European countries between 1990 and 2015, this thesis empirically examines the relationship between bank lending and income inequality. Bank lending is disaggregated into credit to non-bank financial institutions, credit to households for consumption purposes, mortgages and credit non-financial firms. As dependent variables, Income shares of the top 10% and the bottom 50% of the distribution of incomes are considered. The literature relating financial developments and income inequality indicate several transmission channels: increased investment, human and physical capital accumulation and increased wages suggest a negative relationship, while realised capital gains and high wages in the financial sector could positively affect income inequality. This empirical analysis finds that while lending to the non-bank financial sector is robustly linked to an increase in the income share for the top 10% of the income distribution, no other credit channel consistently correlates with changes in income inequality.