Title

The decline of Glass-Steagall: Deregulation and its impact on financial institutions

Date of Completion

January 2001

Keywords

Business Administration, Management|Political Science, Public Administration|Business Administration, Banking

Degree

Ph.D.

Abstract

This dissertation examines the wealth effects on commercial banks, investment banks and thrifts associated with the deregulation of the banking industry through the liberalization of the Glass-Steagall Act. Since its adoption in 1933, this Act effectively separated investment and commercial banking. We examine two event dates related to Glass-Steagall liberalization: the October 30, 1996 easing of firewalls between commercial banks and their Section 20 subsidiaries, and the December 20,1996 increase in securities-related revenues allowed those subsidiaries. We also examine two announcements of acquisitions by commercial banks of investment banks: the April 7, 1997 announcement of the Bankers Trust/Alex Brown acquisition, and the April 6, 1998 announcement of the Citicorp/Travelers Group merger. ^ Our results show a positive wealth effect on the two regulatory announcement dates for commercial banks but not for investment banks or thrifts. On the two acquisition announcement dates, investment banks, commercial banks and thrifts all had significant positive abnormal returns, with investment banks showing the most significant positive returns. ^ Because these regulatory change and acquisition events can affect large and small firms in different ways, we evaluate the data based on each firm's market capitalization using a difference of means test. For the regulatory announcements events, we find that using a difference of means test. For the regulatory announcements events, we find that large commercial banks had significantly higher returns than smaller banks. Investment banks showed no size-based differentiation. Large thrifts showed greater abnormal returns than small for one event. On the acquisition announcement dates, large investment banks had higher returns than small, while commercial banks and thrifts showed no size based differences. We also use cross-sectional regression techniques to test the impact of market capitalization on the wealth effect. We find that capitalization had predictive significance for all of the institutions under certain circumstances. In addition, we identify other institutional characteristics that may influence the wealth effect, including leverage, return on equity, profitability, trading exchange and presence of a Section 20 subsidiary. Of these characteristics, leverage, trading exchange and presence of a Section 20 subsidiary had some predictive significance. ^