Not only does increasing wealth inequality threaten social cohesion and democracy, but new research confirms it can also act as a trigger for financial crises. A new study by the World Inequality Database, Wealth Inequality, Asset Price Bubbles and Financial Crises, reveals how wealth concentration among the top 1 percent fuels financial instability, making economic downturns more likely.

Analyzing data from 18 countries spanning 150 years (1870-2020), the author finds a strong correlation between wealth inequality and financial crises. The study highlights that a one standard deviation increase in the top 1 percent wealth share raises the probability of a financial crisis by 3 to 8 percentage points. This effect is primarily driven by asset price bubbles, particularly in housing and equity markets, which serve as conduits through which wealth accumulation exacerbates economic volatility.

A key mechanism at play is the rising private wealth-to-national income ratio (W/Y), which is linked to crisis occurrence. When private wealth accumulates disproportionately, speculative bubbles inflate, leading to unsustainable asset prices. Once these bubbles burst, the financial system destabilizes, often triggering widespread economic downturns. The study finds that credit expansion destabilizes the financial system within a year, while private wealth accumulation increases financial instability risks over three to four years.

The findings suggest incorporating broader inequality metrics into crisis prediction models and exploring policy interventions to curb extreme wealth disparities. The research underscores one of the many reasons for urgently addressing wealth concentration. As financial stability remains a pressing concern, tackling wealth inequality as a means to stabilize financial systems and mitigate systemic risks could ultimately be a crucial step toward a more resilient global economy.

Access the full study here.