The effects of a shift in monetary policy regime on the profitability and risk of commercial banks

Abstract

This paper examines the effects of the Fed's October 6th, 1979 change in monetary policy regime on the profitability and risk of commercial banks. Using capital market data and an event study methodology it was found that bank stocks exhibited significant abnormal returns during the announcement week of the policy change. When these abnormal returns were decomposed into a part related to unexpected interest rate changes and a part (assumed) to reflect increased rate variability, the results were consistent with a negative relationship between bank returns and interest rate surprises as well as between bank returns and rate variability.