Bank Regulatory Reforms and Institutional Equity Holdings

41 Pages Posted: 27 Mar 2019

See all articles by Michael Bowe

Michael Bowe

University of Manchester

Olga Kolokolova

University of Manchester - Alliance Manchester Business School

Marcin Michalski

University of Liverpool

Date Written: March 5, 2019

Abstract

This paper examines the effects of changes in bank regulatory environment on the risk, return, and liquidity characteristics of equity portfolios of U.S. bank holding companies between 1997 and 2016. Using a comprehensive sample of bank and hedge fund holdings data we examine the impact of the repeal of the Glass-Steagall Act, the introduction of the second and third Basel Capital Accords, and the implementation of the Dodd-Frank legislation on institutional portfolios. We document a significant increase in both the idiosyncratic volatility and illiquidity of banks' portfolios during the period of financial deregulation initiated by the formal removal of restrictions prohibiting banks from engaging in securities trading. In contrast, subsequent reforms of the bank capital requirements system and the prohibition of banks from proprietary trading activities lead to reductions in those metrics. Our results suggest that banks' restricted ability to engage in market-making can be offset by the activities of hedge funds, although the consequences of this substitution for long-term market stability remain unclear.

Keywords: Bank regulation, Bank equity holdings, Portfolio disclosure, Portfolio characteristics, Hedge funds

JEL Classification: G18, G21, G23, G28

Suggested Citation

Bowe, Michael and Kolokolova, Olga and Michalski, Marcin, Bank Regulatory Reforms and Institutional Equity Holdings (March 5, 2019). Available at SSRN: https://ssrn.com/abstract=3347073 or http://dx.doi.org/10.2139/ssrn.3347073

Michael Bowe

University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+44 161 306 3407 (Phone)
+44 161 275 4023 (Fax)

Olga Kolokolova

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom
+441613062081 (Phone)

Marcin Michalski (Contact Author)

University of Liverpool ( email )

University of Liverpool Management School
Chatham Street
Liverpool, L69 7ZH
United Kingdom

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