Heterogeneous Risk Behaviour of Bank Holding Companies after the Dodd–Frank Act

We investigate the risk-taking behaviour of Bank Holding Companies (BHCs) that are subject to the Dodd–Frank Act (DFA). Specifically, we employ a difference-in-differences method to assess the effectiveness of the DFA in reducing the riskiness of complex banks and their contribution to systemic risk. Consistent with the Risk Monitoring Hypothesis, our results suggest that the DFA generally reduced the market risk and Distance to Default of complex BHCs and increased their stability. Furthermore, our findings show that the DFA also caused a significant reduction in the BHC contribution to systemic risk, measured both as Expected Capital Shortfall and the Systemic Expected Shortfall. In addition, we identified various economic transmission channels to explain how the DFA has affected the individual risk of complex BHCs. Our findings are robust to a battery of additional analyses and tests.

Keywords: Dodd–Frank Act, Market Risk, Systemic Risk, Non-bank Subsidiaries, Lending, Borrowing

JEL Classification: G21, G18, G28

Suggested Citation: Suggested Citation

Clark, Ephraim and Degl'Innocenti, Marta and Degl'Innocenti, Marta and Radic, Nemanja and Zhou, Si, Heterogeneous Risk Behaviour of Bank Holding Companies after the Dodd–Frank Act (February 21, 2020). Available at SSRN: https://ssrn.com/abstract=3625670 or http://dx.doi.org/10.2139/ssrn.3625670