Heterogeneous Risk Behaviour of Bank Holding Companies after the Dodd–Frank Act

45 Pages Posted: 8 Jul 2020

See all articles by Ephraim Clark

Ephraim Clark

Middlesex University Business School

Marta Degl'Innocenti

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM); University of Southampton

Nemanja Radic

Cranfield University - School of Management

Si Zhou

Shanghai University

Date Written: February 21, 2020

Abstract

We investigate the risk-taking behaviour of Bank Holding Companies (BHCs) that are subject to the Dodd–Frank Act (DFA). Specifically, we employ a difference-in-differences method to assess the effectiveness of the DFA in reducing the riskiness of complex banks and their contribution to systemic risk. Consistent with the Risk Monitoring Hypothesis, our results suggest that the DFA generally reduced the market risk and Distance to Default of complex BHCs and increased their stability. Furthermore, our findings show that the DFA also caused a significant reduction in the BHC contribution to systemic risk, measured both as Expected Capital Shortfall and the Systemic Expected Shortfall. In addition, we identified various economic transmission channels to explain how the DFA has affected the individual risk of complex BHCs. Our findings are robust to a battery of additional analyses and tests.

Keywords: Dodd–Frank Act, Market Risk, Systemic Risk, Non-bank Subsidiaries, Lending, Borrowing

JEL Classification: G21, G18, G28

Suggested Citation

Clark, Ephraim and Degl'Innocenti, Marta and Radic, Nemanja and Zhou, Si, Heterogeneous Risk Behaviour of Bank Holding Companies after the Dodd–Frank Act (February 21, 2020). Available at SSRN: https://ssrn.com/abstract=3625670 or http://dx.doi.org/10.2139/ssrn.3625670

Ephraim Clark

Middlesex University Business School ( email )

The Burroughs
London, NW4 4BT
United Kingdom

Marta Degl'Innocenti

University of Milan - Department of Economics, Management and Quantitative Methods (DEMM) ( email )

Via Conservatorio, 7
Milan, 20122
Italy

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Nemanja Radic (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Si Zhou

Shanghai University ( email )

Room 522, Building 1,
Shanghai University,
Shanghai, Shanghai 20044
China

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