Get access

On the Riskiness of Universal Banking: Evidence from Banks in the Investment Banking Business Pre- and Post-GLBA

Authors


  • This paper is an extension of “Banks in the Securities Business: Market-Based Implications of Section 20 Subsidiaries,” Federal Reserve Bank of Philadelphia Working Paper No. 05-26. Victoria Geyfman thanks Elyas Elyasiani, Loretta Mester, Mitchell Berlin, Leonard Nakamura, Robert Hunt, seminar participants at the Federal Reserve Bank of Philadelphia, the University of Arkansas, and participants of Mid-Atlantic Research Conference in Finance at Villanova University for helpful comments and discussions.

Abstract

We explore whether an economically significant differential exists in market-based risk measures between universal banks and traditional banks. Using a three-asset portfolio regression model, we find that between 1990 and 2007—a period of gradual deregulation culminating in passage of the Gramm–Leach–Bliley Act (GLBA) of 1999—an increased participation in investment banking was associated with higher total and unsystematic risks and no significant change in systematic risk. Small risk-reduction benefits emerged in the post-GLBA era, but such benefits were likely the result of the particular sample period rather than a fundamental change in bank structure following the GLBA. Our results cannot justify the GLBA on risk-reduction grounds, though the Act may be defensible for other reasons.

Ancillary