Heterogeneous Risk Behaviour of Bank Holding Companies after the Dodd–Frank Act
45 Pages Posted: 8 Jul 2020
Date Written: February 21, 2020
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