For helpful comments on an earlier draft the authors wish to thank Phil Strahan, Diane Silikowski, and audiences at the Federal Reserve Banks of San Francisco and Kansas City.
Safety-Net Losses from Abandoning Glass–Steagall Restrictions
Article first published online: 27 SEP 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue 7, pages 1371–1398, October 2011
How to Cite
CAROW, K. A., KANE, E. J. and NARAYANAN, R. P. (2011), Safety-Net Losses from Abandoning Glass–Steagall Restrictions. Journal of Money, Credit and Banking, 43: 1371–1398. doi: 10.1111/j.1538-4616.2011.00428.x
- Issue published online: 27 SEP 2011
- Article first published online: 27 SEP 2011
- Received January 25, 2008; and accepted in revised form March 30, 2011.
- too big to fail;
- Volcker rule;
- safety-net subsidies
This paper evaluates the redistribution of gains surrounding regulatory relaxations in 1996 and 1997 and ultimate passage of the Financial Services Modernization Act (FSMA) of 1999. Gains in financial institution stocks may come from projected increases in efficiency, increases in the bargaining power of financial institutions, or greater access to the federal safety net. For customers seeking improved access to capital markets, gains in efficiency should result in increased benefits, but increases in bank bargaining power could increase funding costs and/or decrease capital market access. Customers may also lose as taxpayers who support the federal safety net. This paper finds evidence of potential taxpayer losses and increased bank bargaining power, especially vis-à-vis credit-constrained customers for whom safety-net subsidies are unlikely to be shifted forward. The stock prices of credit-constrained customers declined during FSMA event windows and in event windows associated with regulatory relaxations.