Event-study evidence of the value of relaxing long-standing regulatory restraints on banks, 1970–2000

Abstract

In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing longstanding geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

“…This is consistent with the view that large FIs might gain from the DFA at the expense of their smaller counterparts. 23 Overall the results indicate that the DFA might have redistributed value from banks and other financial institutions to investment banks and is consistent with the notion of value redistribution around de-regulatory events (Carow and Kane, 2002), due to changes in the competitive structure of the financial services industry.…”

“…Others, examine the market reaction to the Financial Services Modernization Act (FSMA) of 1999 and generally point to positive wealth effects for insurers (Carow and Heron, 2002;Hendershott et al, 2002;Neale and Peterson, 2005), except for Yildirim et al (2006), who report positive wealth effects and risk reductions for all FIs. Consistent with these studies, Carow and Kane's (2002) survey concludes that the relaxation of long-standing restrictions on the U.S. FIs may have redistributed, rather than created, value.…”

The U.S. Treasury's Capital Purchase Program: Treasury's Selectivity and Market Returns Across Weak and Healthy Banks

“…Similarly, inclusion of real estate exposure does not affect our conclusions. 33 See Carow and Kane (2002) for a review of the financial institution event study literature. Also see Penas and Unal (2004) and Deng, Elyasiani, and Mao (2007) for evidence of bank size on the prices of bonds.…”

The effect of the Gramm-Leach-Bliley Act on the insurance industry

“…Some researchers have documented gains resulting from the mergers (Becher, 2000;Haynes & Thompson, 1999), whereas others have documented wealth losses and a lack of realized efficiency gains (Toyne & Tripp, 1998;Avkiran, 1999;Stiroh & Strahan, 2002). Others find 9 For a more comprehensive review of evidence regarding the effect on both banks and customers, see Carow and Kane (2002). 10 The existence of mixed results may be due to the different time periods studied and the wide range in sample sizes used.…”