The Financial Services Modernization Act: Evolution or Revolution?

Bankers' compensation and fair value accounting

“…AFS assets are more common since banks hold AFS (mostly debt securities) as a reserve of liquid assets to meet unpredictable cash flows, for example out of customer deposits. Banks hold trading securities 5 Yeager et al (2007) provide one examination of this process of deregulation, arguing that it is best understood as a period of gradual evolution of activities as banks exploited new technologies and regulatory loopholes, not a consequence of any single change in financial regulations. 6 See Gibson and Crutcher (1999) for a summary of the provisions of this act.…”

The contribution of product mix versus efficiency and technical change in US banking

“…Event studies (Akhigbe and Whyte, 2001;Al Mamun et al, 2004, 2005 indicate that most market participants expected big changes from the expanded scope allowed by the GLBA, in particular for large banks. Yeager et al (2007) use fixed-effects panel regressions to detect changes in within-firm performance (balance sheet ratios, profitability ratios, and labor revenue productivity ratios) for FHCs relative to their performance as BHCs. They do not find significant synergies between commercial banking, insurance underwriting, and merchant banking.…”

Do insurance activities enhance the performance of financial services holding companies?

“…Stiroh and Rumble (2006) and Yeager et al (2007) find, however, that extension of banking to nonbanking activities provides no diversification benefits for FSHCs eligible to consolidate banking and insurance services. It is notable though that these two studies do not investigate insurance agency business; the former examines three categories of noninterest activities including fiduciary, trading and other noninterest activities while the latter focuses on insurance underwriting alone.…”

“…Divestitures by US financial services holding companies (FSHCs) are often interpreted as an indication that consolidation of commercial banking, investment banking and insurance businesses under the same umbrella produces lacklustre performance (Stiroh and Rumble, 2006;Yeager et al, 2007).…”

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Stiroh and Rumble (2006) and Yeager et al (2007) have argued that extension of banks into nonbanking activities produces no diversification benefits for financial services holding companies (FSHCs) eligible to consolidate banking and insurance products. We investigate the effect of aggregate nonbank activities, as well as two main areas of insurance business, namely agency and underwriting enterprise, on the risk-adjusted performance of FSHCs.

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