Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/222338 
Year of Publication: 
2020
Series/Report no.: 
ECONtribute Discussion Paper No. 012
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
We document that the dispersion of failure risk across banks within a given region in the U.S. is greater in regions that have higher income inequality. We explain this pattern with a model based on risk shifting incentives where banks issue insured deposits and choose the riskiness of their portfolios. In equilibrium: (i) some banks endogenously specialize in safe lending, while others engage in risk shifting and (ii) a competition to risk shift emerges whereby loans to subprime borrowers carry negative NPVs. The dispersion of bank risk generated by this sorting is magnified in more unequal regions with greater subprime credit segments.
Subjects: 
Inequality
Financial stability
Agency costs
Composition of credit
Banking competition
JEL: 
G11
G21
G28
G51
Document Type: 
Working Paper

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