On the Wealth and Risk Effects of the Glass-Steagall Overhaul: Evidence from the Stock Market

Posted: 16 Dec 2002  

Lei Yu

University of Notre Dame

Date Written: 2002

Abstract

The replacement of the 1933 Glass-Steagall Act by the Financial Services Modernization Act of 1999 offers a unique opportunity for empirical analysis of the economic arguments concerning product diversification and consolidation within the financial services industry. This paper analyses the stock price response of firms in the banking, securities, and insurance industries to examine the wealth and risk effects of this deregulation. We find an increase in the collective market value of financial services firms, while the magnitude of the wealth effects differ across industries and size groups. Large securities firms, large insurance companies, and bank holding companies (BHCs) with pre-existing subsidiaries operating in the securities business (section 20 subsidiaries), experienced significant increases in the market value. This reflects market anticipation of gains from product diversification possibly arising from cross-product synergies and the potential extension of "too big to fail" guarantees for the largest financial services firms. We also find that the market accurately predicted the type of BHCs that would engage in product expansion after the repeal.

Keywords: Financial holding companies, Section 20 subsidiaries, "Too big to fail" guarantees, Financial reform

JEL Classification: G21, G28

Suggested Citation

Yu, Lei, On the Wealth and Risk Effects of the Glass-Steagall Overhaul: Evidence from the Stock Market (2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=354389

Lei Yu (Contact Author)

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556
United States
574-631-9935 (Phone)
574-631-5255 (Fax)

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