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The Gramm‐Leach‐Bliley Act Of 1999: Risk Implications For The Financial Services Industry

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  • Aigbe Akhigbe
  • Ann Marie Whyte

Abstract

We document significant risk changes in the financial services industry following the passage of the Gramm‐Leach‐Bliley Act of 1999. Banks experience an increase in risk regardless of whether they have taken steps to participate actively in the investment banking business. Insurance companies also experience an increase in risk, whereas securities firms experience a decrease in risk. We attribute the increase in risk for banks and insurance companies to the fact that the securities business is relatively more risky, and the decline in risk for securities firms to the fact that they can now diversify into relatively less risky banking and insurance businesses.

Suggested Citation

  • Aigbe Akhigbe & Ann Marie Whyte, 2004. "The Gramm‐Leach‐Bliley Act Of 1999: Risk Implications For The Financial Services Industry," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(3), pages 435-446, September.
    • Handle: RePEc:bla:jfnres:v:27:y:2004:i:3:p:435-446
    DOI: 10.1111/j.1475-6803.2004.00093.x
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    Cited by:

    1. Sorokina, Nonna & Thornton, John H., 2016. "Reactions of equity markets to recent financial reforms," Journal of Economics and Business, Elsevier, vol. 87(C), pages 50-69.
    2. Dung V. Tran & M. Kabir Hassan & Isabelle Girerd‐Potin & Pascal Louvet, 2020. "Activity Strategies, Agency Problems, And Bank Risk," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 575-613, August.
    3. Atul Gupta & Lalatendu Misra, 2007. "Deal size, bid prremium, and gains in bank mergers: The impact of managerial motivations," Working Papers 0018, College of Business, University of Texas at San Antonio.
    4. Neale Faith R. & Drake Pamela Peterson & Clark Steven P., 2010. "Diversification in the Financial Services Industry: The Effect of the Financial Modernization Act," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(1), pages 1-30, March.
    5. Meslier, Céline & Tacneng, Ruth & Tarazi, Amine, 2014. "Is bank income diversification beneficial? Evidence from an emerging economy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 97-126.
    6. Jussi Keppo & Josef Korte, 2018. "Risk Targeting and Policy Illusions—Evidence from the Announcement of the Volcker Rule," Management Science, INFORMS, vol. 64(1), pages 215-234, January.
    7. H. Semih Yildirim & Seung‐Woog (Austin) Kwag & M. Cary Collins, 2006. "An Examination of the Equity Market Response to The Gramm‐Leach‐Bliley Act Across Commercial Banking, Investment Banking, and Insurance Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1629-1649, November.
    8. Premti, Arjan & Jafarinejad, Mohammad & Balani, Henry, 2021. "The impact of the Fourth Anti-Money Laundering Directive on the valuation of EU banks," Research in International Business and Finance, Elsevier, vol. 57(C).
    9. Jane‐Sue Wang & Jing‐Twen Chen & Pin‐Huang Chou, 2008. "Market Reactions To The Passage Of The Financial Holding Company Act In Taiwan," Pacific Economic Review, Wiley Blackwell, vol. 13(4), pages 453-472, October.
    10. Maxim Zagonov & Angela Kate Pettinicchio & Galla Salganik-Shoshan, 2017. "Audit quality, bank risks, and cross-country regulations," Economics Bulletin, AccessEcon, vol. 37(3), pages 1666-1687.
    11. Vander Vennet Rudi & De Jonghe Olivier & De Bruyckere Valerie & Baele Lieven, 2011. "Enhancing Bank Transparency: Risk Ineffciency as a Market Disciplining Mechanism," 2011 Meeting Papers 559, Society for Economic Dynamics.
    12. McSweeney, Brendan, 2009. "The roles of financial asset market failure denial and the economic crisis: Reflections on accounting and financial theories and practices," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 835-848, August.
    13. I‐Ju Chen & Yu‐Yi Lee & Yong‐Chin Liu, 2020. "Bank liquidity, macroeconomic risk, and bank risk: Evidence from the Financial Services Modernization Act," European Financial Management, European Financial Management Association, vol. 26(1), pages 143-175, January.
    14. Aigbe Akhigbe & Anna D. Martin & Ann Marie Whyte, 2016. "Dodd–Frank and risk in the financial services industry," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 395-415, August.
    15. Akhigbe, Aigbe & Martin, Anna D., 2008. "Influence of disclosure and governance on risk of US financial services firms following Sarbanes-Oxley," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2124-2135, October.
    16. Cuong, Ly Kim, 2021. "Are financial holding companies' subsidiaries riskier than bank holding companies’ affiliates?," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1025-1033.
    17. Filson, Darren & Olfati, Saman, 2014. "The impacts of Gramm–Leach–Bliley bank diversification on value and risk," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 209-221.
    18. Mohanty, Sunil K. & Akhigbe, Aigbe & Basheikh, Abdulrahman & Khan, Haroon ur Rashid, 2018. "The Dodd-Frank Act and Basel III: Market-based risk implications for global systemically important banks (G-SIBs)," Journal of Multinational Financial Management, Elsevier, vol. 47, pages 91-109.
    19. Chen, Zhongdong & Ebrahim, Alireza, 2018. "Turnover threat and CEO risk-taking behavior in the banking industry," Journal of Banking & Finance, Elsevier, vol. 96(C), pages 87-105.
    20. Chronopoulos, Dimitris K. & Wilson, John O.S. & Yilmaz, Muhammed H., 2023. "Regulatory oversight and bank risk," Journal of Financial Stability, Elsevier, vol. 64(C).
    21. Atul Gupta & Bently Lalatendu Misra, 2007. "Deal size, bid premium, and gains in bank mergers: The impact of managerial motivations," Working Papers 0004, College of Business, University of Texas at San Antonio.
    22. Haq, Mamiza & Heaney, Richard, 2009. "European bank equity risk: 1995-2006," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(2), pages 274-288, April.
    23. Huang, Qiubin & de Haan, Jakob & Scholtens, Bert, 2020. "Does bank capitalization matter for bank stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).

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