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

September 1, 2004
By Abdullah Al Mamun, M. Kabir Hassan, Van Son Lai

This paper, published in the Journal of Economics and Finance, uses historical economic and financial data to study the effect of the Gramm-Leach-Bliley Act (GLB Act) on financial institutions.

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This paper, published in the Journal of Economics and Finance, uses historical economic and financial data to study the effect of the Gramm-Leach-Bliley Act (GLB Act) on financial institutions.

Instead of making banks and financial institutions more risky, repealing Glass-Steagall has made banking more stable, Al Mamun and the researchers write.

“Our results show that exposure to systematic risk has been significantly reduced across the entire financial services industry,” Al Mamun and the researchers write. “We find that the financial services industry gains as a result of this law; after normalizing for asset value, the results show that banking followed by the insurance industry gains the most due to the passage of the GLB Act.”

Because of the diversification allowed by the GLB Act, some classes of financial institutions are affected by economic changes differently than others, Al Mamun and the researchers write.

“One major concern of the legislators and regulators is not to let excessive risk-taking by the industry result from this law,” AI Mamun and the researchers write. “Due to the specific guidelines included in the law, the GLB Act created diversification opportunities for the financial services industry and hence appears to reduce exposure to systematic risk. We find that the law has a significant impact on the financial services industry, and there are at least five announcements that have a differential impact across the three industries. We also find that all three sectors of the financial services industry have gained from this law, and when normalized for the asset base it turns out that the banking industry benefits most among the three sectors, followed by the insurance industry.”

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FIRE Economy