The Impact of Structural Reform Proposals

Project Start:03/2016
Researchers:Rainer Haselmann, Lara Milione, Tobias Tröger
Category: Law and Finance
Funded by:LOEWE

As a reaction to the financial crisis of 2007/2008 many jurisdictions passed legislation that prohibits retail and commercial banks to conduct certain business activities or mandates their transfer to separate enties. Universal banks have fiercely criticized these initiatives and pointed to a hike in operative costs that is not compensated by an increased resilience of the financial system. Despite a common starting point, the proposals differ quite significantly in detail (e.g. ban on proprietary trading under Volcker rule, ring fencing in accordance with Vickers report, mandatory separation in accordance with Liikanen report). In a first (comparative law) step, this project seeks to delineate the relevant differences between key jurisdictions (U.S., U.K., Germany, and E.U.). In a second (finance) sept, it tries to gauge the social welfare implications of each initiative by using an event-study methodology that looks at share-price reactions on the carefully selected announcement date of the relevant proposals. The intuition is that shareholders in banks who would inevitably suffer losses in a systemic crisis should welcome a net-gain in financial stability but penalize a (perceived) hike in operating costs without overshooting benefit.