The Wealth and Risk Effects of the Gramm‐Leach‐Bliley Act (GLBA) on the US Banking Industry

Abstract

The Gramm-Leach-Bliley Act (GLBA) of 1999 marks the end of Depression era regulations like the Glass-Steagall Act of 1933 and Bank Holding Company Act of 1956. These acts have restricted banks from securities and insurance underwriting business. This paper examines the impact of the GLBA on the banking industry. We find that the banking industry has a welfare gain from this law. We investigate two different categorizations of the banking industry. We find that Money Center banks followed by the Super Regional banks benefited most from this deregulation. On the other hand, banks that had Section 20 investment subsidiaries gained more than other banks in the second category. The results also show that the exposure to systematic risk for different categories of banks decreased after the passage of this law, which implies that the GLBA is fairly successful in containing the risk that accompanied the act and also created diversification opportunities. For Money Center banks, Super Regional Banks, banks with a section 20 subsidiary and banks with a new financial subsidiary, a shift in the exposure to systematic risk can explain the overall cross sectional variation in return from the deregulation. In both categorizations we find that larger banks gained more, while the overall explanatory power of profitability is not conclusive. Copyright Blackwell Publishers Ltd, 2005.

The Financial Services Modernization Act: Evolution or Revolution?

“…Carow and Heron (2002) and Hendershott, Lee, and Tompkins (2002) find positive stock market reactions from investment banks and insurance companies to the passage of the GLBA; however, they find that the stock prices of both small and large banks were unaffected by the legislation presumably because the major benefits to banks from product-line diversification were already impounded into bank stock prices before passage of the legislation. On the other hand, Akhigbe and Whyte (2001), Al Mamun, Hassan, and Lai (2004), and Al Mamun, Hassan, and Maroney (2005) find positive abnormal returns for BHCs, with large banks benefiting the most. In sum, event studies find strong evidence that markets expected the largest banks to benefit from the reemergence of universal banking.…”

Influence of disclosure and governance on risk of US financial services firms following Sarbanes-Oxley

“…Higher risk with strong disclosure and governance Lang and Lundholm (1993) and Bushee and Noe (2000) find that greater return volatility is associated with higher quality disclosure, due to attempts by managers to reduce information asymmetry and due to institutional investors 1 Akhigbe and Whyte (2004) and Mamun et al (2005), however, empirically find that market risk was reduced following the passage of GLBA. Mamun et al (2005) argue that the reduction in market risk occurred because the GLBA legislation was successful in containing the incremental risk and created diversification opportunities. Nevertheless, any increase in market risk that occurs in the post-SOX period is unlikely attributed to the GLBA.…”

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“…Mahlberg and Url 27 also analyse a panel of Austrian insurance companies from 1992 to 1999 to access the insurance industry's response to the challenges of the single market; however, their DEA-based efficiency measure seems likely to identify these companies as inefficient compared with other companies, even if they offered favourable terms to consumers. In their application of DEA, Tone and Sahoo 28 examine the performance of the Life Insurance Corporation of India and find significant differences in the cost efficiency scores over the period 1994-2001 For example Carow (2001); Hughes et al (1999); Mamun et al (2005). 20 Saunders and Walter (1994).…”