The Long-Term Risk Effects of the Gramm-Leach-Bliley Act (GLBA) on the Financial Services Industry

Abstract

We examine whether systematic risk of the financial services industry (banks, finance, insurance, and real-estate sectors) declined after the passage of GLBA. This study differs from prior work in that we examine changes over a long period of time (5 years before and 5 years after the Act) and we use the Carhart (1997) four-factor model for assessing changes in risks. The study finds that banks, insurance, finance, and real-estate segments load on the market, size, and value factors before as well as after GLBA (the real-estate segment loads on the value factor only after GLBA). Except for finance companies, betas decline significantly for all the other segments after the GLBA. In the case of banks even their loadings on the size and value factors decline after the GLBA, while in the case of finance and real-estate companies the loadings on the momentum factor exhibits reduction in risk after the Act. Overall, the GLBA had a risk reducing impact on the financial services industry.

Citation

Gondhalekar, V., Narayanaswamy, C.R. and Sundaram, S. (2007), "The Long-Term Risk Effects of the Gramm-Leach-Bliley Act (GLBA) on the Financial Services Industry", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Issues in Corporate Governance and Finance (Advances in Financial Economics, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 361-377. https://doi.org/10.1016/S1569-3732(07)12014-4