U.S. Banking Sector Risk in an Era of Regulatory Change: A Bivariate GARCH Approach

Robert Brooks, Robert Faff, Michael D. McKenzie and Yew Kee Ho

Review of Quantitative Finance and Accounting, 2000, vol. 14, issue 1, 17-43

Abstract: This paper assesses the impact of regulatory change on the risk and returns of the U.S. banking industry. The impact of five major regulatory changes on banking sector risk was assessed using daily data for eighteen major U.S. regional banks, money center banks and savings and loan type depository institutions. Risk in this case was proxied via the use of an M-GARCH model which generates time dependent conditional beta estimates. The evidence obtained suggests that the impact of deregulation and reregulation on banking sector risk is case specific. Further, the results obtained show that the market model incorporating dummy variables, which has proven so popular amongst existing studies, discards important information about the variability of beta which the time varying conditional betas capture. Copyright 2000 by Kluwer Academic Publishers

Date: 2000
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