The empirical literature on the effects of banking crises on income inequality has yielded mixed

findings. In this paper, we aim to reconcile these mixed results by evaluating the effects of

banking crises on income inequality in relation to pre-crisis credit gaps. We apply the Local

Projections methodology to a yearly panel of 68 banking crises that occurred in 59 countries over

the period 1970–2017. Three key results emerge. First, banking crises lead to increased income

inequality. Second, only those banking crises preceded by larger credit gaps show a significant

increase in income inequality. Third, a deeper contraction in the credit supply and a higher

unemployment rate are two channels that could potentially explain why inequality rises more

after banking crises with larger pre-crisis credit gaps. These results underscore the importance of

macroprudential policies that, as well as limiting the amplitude of the financial cycle and the

associated risks of financial crises, could also play a key role in reducing the distributional

consequences of banking crises.