Has Market Discipline on Banks Improved after the Dodd-Frank Act?

Balasubramanian, Bhanu; Cyree, Ken B.

doi:10.2139/ssrn.2349042

Cited by 19 publications

(22 citation statements)

References 18 publications

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“…Once again, the consensus that banks' securities activities were the main contributor to the crisis has dominated these debates. As a result, the U.S. government introduced the DFA aiming to alleviate systemic risk, end implicit guarantees and, ultimately, promote better market discipline (Balasubramnian and Cyree, 2014). 7 The Act attempts to deal with financial institutions in the following ways.…”

Section: Regulatory Landscape and Hypothesesmentioning

confidence: 99%

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

Andriosopoulos

Chan

Dontis-Charitos

et al. 2017

Journal of Financial Stability

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We contribute to the current regulatory debate by examining the wealth and risk effects of the Dodd-Frank Act on U.S. financial institutions. We measure the effects of key legislative events of the Act by means of a multivariate regression model using the seemingly unrelated regression (SUR) framework. Our results indicate a mixed reaction by financial institutions during the various stages of the Act's legislative process. Further tests reveal that any positive reactions are driven by small and/or low risk institutions, while negative ones are consistent across subsets; except for investment banks. We also find market risk increases for most financial institutions that are dominated by small and/or low risk institutions. The cross-section results reveal that large institutions fare better than their smaller counterparts and that large investment banks gain value at the expense of others. Overall, the Dodd-Frank Act may have redistributed value among financial institutions, while not necessarily reducing the industry's riskiness.

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Section: Regulatory Landscape and Hypothesesmentioning

confidence: 99%

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

Andriosopoulos

Chan

Dontis-Charitos

et al. 2017

Journal of Financial Stability

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“…Examples in the labor economics and finance fields areNeumark and Wascher (2006) andBalasubramnian and Cyree (2014). These studies examine the effect on employment of changes in federal and state minimum…”

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confidence: 99%

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

Tewari

White

2014

SSRN Journal

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We assess the credit market impact of mortgage "strip-down"-reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 7 or Chapter 13 bankruptcy. Strip-down of mortgages in bankruptcy was proposed as a means of reducing foreclosures during the recent mortgage crisis but was blocked by lenders. Our goal is to determine whether allowing bankruptcy judges to modify mortgages would have a large adverse impact on new mortgage applicants. Our identification is provided by a series of U.S. Court of Appeals decisions during the late 1980s and early 1990s that introduced mortgage strip-down under both bankruptcy chapters in parts of the U.S., followed by two Supreme Court rulings that abolished it throughout the U.S. We find that the Supreme Court decision to abolish mortgage strip-down under Chapter 13 led to a reduction of 3% in mortgage interest rates and an increase of 1% in mortgage approval rates, while the Supreme Court decision to abolish stripdown under Chapter 7 led to a reduction of 2% in approval rates and no change in interest rates. We also find that markets react less to circuit court decisions than to Supreme Court decisions. Overall, our results suggest that lenders respond to forced renegotiation of contracts in bankruptcy, but their responses are small and not always in the predicted direction. The lack of systematic patterns evident in our results suggests that introducing mortgage strip-down under either bankruptcy chapter would not have strong adverse effects on mortgage loan terms and could be a useful new policy tool to reduce foreclosures when future housing bubbles burst.

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“…Anticipation of merger activity could also be attributed to regulatory changes; Schipper and Thompson (1983) Despite the extensive research for the regulatory effects on mergers, prior literature for the Dodd-Frank Act focuses primarily on issues other than the U.S. bank M&A activity. Balasubramnian and Cyree (2014) present evidence that the TBTF discount in yield spreads has been diminished by 94% and attribute this result to the improved market discipline associated with the DFA. Calomiris and Nissim (2014) document that in the post-crisis period and after the implementation of the Volcker Rule, higher bank leverage translates into lower market values.…”

Section: Review On Bank Manda Studiesmentioning

confidence: 74%

U.S. Bank M&As in the Post-Dodd-Frank Act Era: Do They Create Value?

Leledakis

Pyrgiotakis

2016

SSRN Journal

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The Dodd-Frank Act has produced a new wave of bank M&As. This consolidation trend is mainly driven by mergers of small banks, since small banks feel the need to merge in order to absorb the compliance costs of the new regulation. We document that the $10 billion asset-size threshold has become the ceiling of the optimal scale for bank combinations, given that banks below this $10 billion mark avoid several regulatory hurdles imposed by the Dodd-Frank Act. Results for these "less than $10 billion mergers" suggest significant value creation for both firms' shareholders: Bidders experience large anticipated wealth gains during the passage of the legislation since the market had ex-ante identified these bids. Consequently, at the deal announcement date, bidders experience insignificant returns, targets experience large abnormal returns and the combined abnormal returns are statistically positive. Finally, bidders experience positive abnormal returns at the deal completion date. On the contrary, results for larger bank mergers indicate a redistribution of wealth from the bidder to the target firm.

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Has Market Discipline on Banks Improved after the Dodd-Frank Act?

Cited by 19 publications

References 18 publications

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

Wealth and risk implications of the Dodd-Frank Act on the U.S. financial intermediaries

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

U.S. Bank M&As in the Post-Dodd-Frank Act Era: Do They Create Value?

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