The Impact of the Gramm-Leach-Bliley Act on the Financial Services Industry

By Mamun, Abdullah Al; Hassan, M. Kabir et al. | Journal of Economics and Finance, Fall 2004 | Go to article overview

The Impact of the Gramm-Leach-Bliley Act on the Financial Services Industry


Mamun, Abdullah Al, Hassan, M. Kabir, Lai, Van Son, Journal of Economics and Finance


Abstract

This paper examines the impact of Gramm-Leach-Bliley Act across three main sectors of the financial services industry: commercial banks, insurance companies, and brokerage firms, taking account of the wealth effect associated with the announcement. We find that the law has a differential impact across the financial services industry. All three industries have gained due to this law with commercial banks benefiting most, followed by the insurance industry. Further, the results show that larger firms benefited more in both the banking and insurance industries and exposure to systematic risk was reduced for all sectors of the financial services industry after this regulation passed. (JEL G20)

Introduction

This study examines the impact of the Financial Services Modernization Act or the GrammLeach-Bliley (GLB) Act of 1999 on the stockholder returns of the banking, insurance, and brokerage industries. It also examines the factors that can explain the returns associated with the important announcements and the impact of this law on exposure to systematic risk across the industries. We use financial market data to assess the impact of the deregulation.1 The GBL Act repealed the Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956 and allowed banks, brokerage firms, and insurance companies to merge.

The GLB Act did not fundamentally change the nature of the "mixing" of banking and other financial services but rather ratified and extended what was already being practiced as a result of the gradual liberalization of the Glass-Steagall restrictions. There are several studies that examine the major deregulations leading up to the GLB Act. For instance, Cornett, Ors, and Tehranian (2002) examine the performance of commercial banks around the establishment of a section 20 subsidiary. They find that the initial alliances of commercial banks and brokerage firms via the establishment of section 20 subsidiaries have been beneficial to commercial bank performance and allowed commercial banks to diversify their activities with increased performance relative to the risk being undertaken. Cyree (2000) finds similar results for commercial banks when the revenue limit from the investment banking activity increased from 10 percent to 25 percent of their total revenues. He finds that larger banks benefit more than smaller banks. Ely and Robinson (1998) analyze the wealth effect of an increase in the limit on banks' securities subsidiaries revenue from 10 percent to 25 percent on banking and securities firms. They find that this expansion has a positive wealth effect for most of the brokerage firms and banks, especially for banks that already have a securities subsidiary. Gande, Puri, and Saunders (1999) find that underwriting spread and ex-ante yields have declined significantly with bank entry into the corporate debt underwriting market. These effects are strongest among the lower-rated, smaller debt issues of which banks have underwritten a relatively greater share. They show that bank entry decreased market concentrations. Puri (1996) finds that investors are willing to pay higher prices for securities underwritten by banks rather than brokerage firms.

Several studies investigated the impact of the GLB Act on the financial services industry. Hendershott, Lee, and Tompkins (2002) find a significantly positive wealth effect of one event on both the insurance and brokerage industries; however, they do not find any wealth effect on commercial banks. They argue that loopholes in the laws have long allowed banks to have a "fairly substantial presence in other sectors" as a reason there is no wealth effect for commercial banks. For all three industries, they find that only the size of the firms explains the cross-sectional varation of wealth effect. Similarly, Carow and Heron (2002) find that brokerage firms and insurance companies benefit from the GLB Act but banks do not benefit. They also find negative returns for foreign banks, thrifts, and finance companies. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

The Impact of the Gramm-Leach-Bliley Act on the Financial Services Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.