Economics and Finance Faculty Publications and Presentations
Document Type
Article
Publication Date
9-20-2019
Abstract
Purpose
The purpose of this paper is to explore the impact of financial regulation policy uncertainty (FRPU) on bank profit and risk.
Design/methodology/approach
This study applies dynamic panel techniques and uses the Baker et al. (2016) FRPU index and macroeconomic variables to assess FRPU’s impact on bank profit and risk using Federal Deposit Insurance Corporation call reports from Q1 2000 to Q4 2016 for over 4,760 commercial banks.
Findings
The effect of FRPU on profitability (Return on Assets [ROA] and Return on Equity [ROE]) and risk (standard deviation of ROA and ROE) produces complex results. FRPU negatively (positively) impacts profits for small and large banks (money center banks). There is a positive impact of FRPU on risk for small and medium-sized banks, with no impact reported for the large and money center banks.
Practical implications
Findings lead to several implications for financial services regulators, investors and executives as summarized in the conclusion. It is essential to ensure that clear communication channels are open especially to small and medium-sized banks for proper strategic planning, given their greater sensitivity to regulatory uncertainty.
Originality/value
This paper contributes to the literature as follows. First, it explores the impact of FRPU on bank profits and risk using a novel index introduced by Baker et al. (2016). This news-based continuous measure presents a bank profit modeling approach that differs from traditional event study methodology. Second, a large sample of US commercial banks is used which represents an important departure from banking regulation studies.
Recommended Citation
Killins, R. N., Johnk, D. W., & Egly, P. V. (2019). The impact of financial regulation policy uncertainty on bank profits and risk. Studies in Economics and Finance, 37(4), 725–752. https://doi.org/10.1108/SEF-05-2019-0169
Publication Title
Studies in Economics and Finance
DOI
10.1108/SEF-05-2019-0169
Comments
© 2019, Emerald Publishing Limited. Original published version available at https://doi.org/10.1108/SEF-05-2019-0169