The role of bank diversity in the banking development-income inequality nexus. Regional evidence from Italy

PurposeThe function of banking development in reducing income inequality is critical because financial institutions can grant loans, stimulating prospective productive investments. Based on this promise, the aim of this study is to fill the vacuum by particularly evaluating the influence of banking development, as proxied by bank cost efficiency estimated using a parametric approach, on income inequality.Design/methodology/approachTo evaluate the impact of banking development on income inequality, the authors use data from 20 Italian regions from 2004 to 2017. Particular attention will be made to the consequences that the varied composition of the Italian banking structure, namely, the presence of cooperative and non-cooperative banks, may have on income inequality. To do this, the authors use a generalized method of moments (GMM) regression on panel data to address the endogeneity problem that exists between banking development and income inequality.FindingsEvidence reveals that increasing bank development plays an important impact in reducing income inequality, with cooperative banks faring best. A set of robustness tests generally validates our empirical findings and brings relevant policy implications.Originality/valueA "qualitative" measure, such as cost efficiency, which is computed using a parametric technique, has been used as a proxy for banking development to analyse the relationship between banking development and income inequality. The contribution, in particular, focuses on how bank diversity influences the nexus between banking development and income inequality in a homogenous context.