Regulatory Oversight and Bank Risk

Abstract

We investigate how a change in regulatory oversight affects bank risk. Using the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 as a setting, and a sample of bank holding companies (BHCs) over the period 2015Q1 through 2020Q1, we find that risk increases for the large BHCs that benefitted from the change in regulatory oversight. In addition to increasing individual bank risk, affected BHCs experience heightened systemic risk. These BHCs also benefit from higher profitability, increased market valuation and reduced compliance costs.

Keywords: Bank Regulation, Bank Risk, Difference-in-Differences, Dodd-Frank Act, Economic Growth, Regulatory Relief, and Consumer Protection Act

JEL Classification: G21, G28, G32