We present evidence that discretionary risk taking by financial institutions has declined following the passage of Dodd–Frank. The largest institutions experience the greatest reduction in risk consistent with the legislation’s objective of reducing systemic risk and an ultimate goal of ending the too-big-to-fail doctrine. Analysis of a sample of banks, the most highly regulated financial institutions, reveals that banks exhibiting characteristics consistent with riskier business strategies prior to Dodd–Frank experience the greatest risk reduction. Further, banks that alter their business practices by increasing their capital ratios and reducing their level of non-performing loans following the law’s passage are shown to experience the greatest reduction in risk. Our results point to the efficacy of Dodd–Frank in reducing risk in the financial system.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Feb 27, 2015
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