Banking structural reforms and top income shares: regulate or deregulate?

This article examines the impact of major banking structural reforms on top income shares in Canada and Italy, two bank-based economies that underwent significant deregulation and liberalization in the early 1990s. Using the Synthetic Control Method (SCM) to create counterfactual scenarios, the study finds that banking deregulation contributed to a substantial increase in the income shares of the top 10%, 5%, 1%, and 0.1% earners—rising by approximately 5–6% in Italy and 12–19% in Canada over 5 to 10 years post-reform. The analysis identifies potential direct transmission channels including increased banking market concentration, higher wages in the financial sector, growth in banks' non-interest income from non-traditional activities, and accumulation of financial wealth. Additionally, the reforms did not enhance economic efficiency as measured by GDP per capita, suggesting possible distortions. The article highlights the need for further research on the mechanisms linking banking deregulation to income inequality and calls for policymakers to consider these effects when designing financial sector reforms.