Matias Ossandon Busch (Center for Latin American Monetary Studies) - Income inequality and capital reallocation in the presence of financial frictions

Matias Ossandon Busch (Center for Latin American Monetary Studies) - Income inequality and capital reallocation in the presence of financial frictions

Abstract
Does income inequality affect banks' credit-risk reallocation when facing financial distress? Using novel branch-level data on Colombian banks I find that facing a large liquidity shock, exposed banks shift more credit towards low-risk borrowers in municipalities with higher income inequality. For identification I compare branches' reaction to a foreign funding shock within banks and across regions by simultaneously absorbing local demand. Collateral frictions play a key role: while the overall effect is stronger in regions with higher collateral constraints, credit backed by better collateral remains consistently shielded. Regional-level estimates suggest that this `inequality risk-taking channel' can account for a significant share of consumption growth in crisis periods.

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