The effect of regulations on financial system stability: an analysis of the impact of the Volcker rule on the US banking system

Abstract

This paper seeks to evaluate the impact of the announcement of the Volcker rule on the performance of the stock prices /return on Bank Holding Companies in the US. In order to test the effect of this policy change, daily stock prices and trading assets of 415 Bank Holding Companies in the United States between 2009-2012 were obtained and were classified into three groups according to the value of their trading assets. An event study was carried out on the Cumulative abnormal returns of these companies on three different announcement dates which are considered vital to the implementation of the rule. It was observed that U.S capital market reacted negatively to the announcement of the rule on those three dates but the effect was more pronounced in the prices of the securities that were exposed to proprietary trading (trading assets) and this was significant around the first announcement date at the 10% significance level. However, the market also reacted negatively on the other two dates, but was not as significant as the first time when the market was anticipating the announcement. This evidence suggests that the Volcker rule had an adverse effect on the securities values of banks that engage in proprietary trading and could possibly curb their involvement in these speculative trading activities.