The Gramm-Leach-Bliley Act Of 1999: Risk Implications For The Financial Services Industry

We document significant risk changes in the financial services industry following the passage of the Gramm-Leach-Bliley Act of 1999. Banks experience an increase in risk regardless of whether they have taken steps to participate actively in the investment banking business. Insurance companies also experience an increase in risk, whereas securities firms experience a decrease in risk. We attribute the increase in risk for banks and insurance companies to the fact that the securities business is relatively more risky, and the decline in risk for securities firms to the fact that they can now diversify into relatively less risky banking and insurance businesses

Bank acquisitions of security firms: the early evidence

A bank acquisition affects the combination of financial services that are offered, and the potential synergy between services. Consequently, an acquisition can affect the performance and risk of the bank. While much research is focused on bank acquisitions and other financial institutions, there is very little research on the performance following bank acquisitions of securities firms. Until recently, banks were restricted from acquiring securities firms. Thus, related research could only speculate on the effects from integrating bank and securities services, or measure the initial market response to related regulatory changes. It is found that the announcement effects when banks acquire security firms are not significant. Similar results are found for a matched sample of bank acquisitions of other banks. Second, bank acquirers of security firms do not experience a reduction in risk, offering no support for the diversification hypothesis. These results also hold when applying a cross-sectional analysis that controls for other characteristics of the acquirers. Third, banks that acquire security firms experience weaker performance following the acquisitions than banks that acquire other banks. The results may be attributed to the high level of risk of securities firms as independent entities, the high price paid to acquire these firms, and the difficulty in merging bank and securities operations and cultures. These findings do not refute the notion of beneficial synergies between banks and security firms. However, they may suggest that the favourable revaluations of banks as a result of signals about impending consolidation were excessive. Consequently, the price paid by banks for security firm targets may have been excessive, allowing a wealth transfer to the security firm shareholders before the wave of acquisitions occurred. In addition, the market may have underestimated the complications and cost resulting from the integration of security activities with banking activities.

Seo Announcement Returns And Internal Capital Market Efficiency

We test the hypothesis that efficient internal capital markets mitigate the negative announcement returns surrounding seasoned equity offerings (SEOs). Our predictions are based on the argument that efficiency reduces uncertainty regarding the value of assets-in-place. Having established the inverse association between our efficiency measures and uncertainty, we show that the efficiency measures are positively associated with SEO announcement returns, particularly among firms with multiple segment codes. The positive relation suggests that efficiency mitigates uncertainty regarding the value of assets-in-place, and this is the channel through which more favorable announcement returns are produced in response to the SEOs of high efficiency firms

The Market’S Assessment Of The Financial Services Modernization Act Of 1999

We examine the impact of the events leading up to and including the passage of the Financial Services Modernization Act (FSMA) of 1999 on the stock returns of banks, brokerage firms, and insurance companies. We find that the impact is positive for all institutions. Bank gains are positively related to size and capitalization. Brokerage firms gain regardless of size, but the gains are inversely related to capitalization and insurance companies gain regardless of size or capital position. The strong positive reaction suggests that the market expects the institutions to benefit from the new opportunities created by the FSMA’s passage. © 2001 Blackwell Publishing Ltd

The Impact Of Fdicia On Bank Returns And Risk: Evidence From The Capital Markets

This study examines the impact of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 on bank stock returns and risk. We find that FDICIA had a generally positive effect on bank stock returns and resulted in a significant reduction in bank risk. The extent of the risk reduction varies based on the capitalization, size, and credit risk of the institutions with poorly capitalized, large, and high credit risk banks experiencing the greatest risk reduction. The results obtained using two separate control groups also bolster the conclusion that FDICIA\u27s passage resulted in a significant decline in bank risk. © 2001 Elsevier Science B.V