A new test of the relationship between regulatory change in financial markets and the stability of beta risk of depository institutions

The US economy experienced major regulatory changes in the banking and finance industry with the passage of five major acts over the period 1980 to 1991. This has generated an extensive literature investigating the effects of these changes on the US banking industry. In particular, this body of rese...

Full description

Saved in:
Bibliographic Details
Published in:Journal of banking & finance 1997-02, Vol.21 (2), p.197-219
Main Authors: Brooks, Robert D., Faff, Robert W., Ho, Yew Kee
Format: Article
Language:English
Subjects:
Banking
Banking industry
Banking systems
Beta instability
Capital market
Effects
Market model
Regulation
Regulation of financial institutions
Regulatory change
Risk
Stock exchange
Studies
U.S.A
US banking sector
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The US economy experienced major regulatory changes in the banking and finance industry with the passage of five major acts over the period 1980 to 1991. This has generated an extensive literature investigating the effects of these changes on the US banking industry. In particular, this body of research has examined the share market reaction to regulatory changes, as well as their impact on the risk, return, market value and profitability of banking industry stocks. Generally, it has been found that the regulatory changes have had a substantial impact, although the effect has not been uniform across all depository institutions. This paper extends this literature by analysing the stability of a sample of eighteen US banking industry stock betas across five periods: a pre-regulatory change period, a monetary experiment period, a deregulation period, a reregulation period and a post-regulatory change period. Based on an analysis of weekly returns, we find that the level of bank risk has increased. Further, we also find a tendency towards greater beta instability in both the monetary experiment and deregulation samples. The degree of beta instability is lowest in the pre-regulatory change and post-regulatory change samples. Overall the monetary experiment and regulatory change coincided with an increased tendency towards beta instability. We also compare our results to a randomly selected control sample of non-banks and find some more general effects of regulatory change on individual stock betas.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(96)00034-9