The accounting implication of banking deregulation: an event study of Gramm-Leach-Bliley Act (1999)

Bank regulation has undergone almost a complete circle from the Glass-Steagall Act (GSA, 1933), through a period of deregulation since 1980s, culminating in the repeal of GSA by the Gramm-Leach-Bliley Act (GLBA, 1999), to the Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA, 2010), which attempted to restore some of the rules under GSA. The GLBA allowed the largest U.S. bank holding companies to expand into more market-sensitive business activities, which contributed to a significant increase in their market, operating and accounting risks. Despite increasing reporting requirements, bank accounting information decreased in value relevance in terms of both earnings quality and Statistical Cost Relationship during the post-GLBA period. The increasing opaqueness in the bank accounting information weakened market efficiency and had a negative impact on the effectiveness of regulatory supervision. Lessons learned from the repeal of GSA are timely and relevant to the implementation of DFA.