The impact of the Fourth Anti-Money Laundering Directive on the valuation of EU banks

Abstract

Anti-money laundering regulations have costs and benefits for banks. To better understand how these regulations affect banks, we study the valuation effects of the Fourth Anti-Money Laundering Directive (4AMLD) on a sample of European banks. First, using eight significant 4AMLD-related events between the initial announcement (February 5, 2013) and the final enactment (June 26, 2015), we show that the 4AMLD had a positive valuation effect on European banks and helped reduce their systematic risk. Then, using a cross-sectional model, we find that the positive valuation effect was higher for riskier, larger, and more profitable banks with more non-traditional revenue streams, as well as banks operating in rich countries, countries with less effective corporate governance, and countries with higher perception of corruption. These findings provide a better understanding of how anti-money laundering regulations affect banks in order to assist regulators in shaping future policies, as well as bank managers and investors in making better financial and investment decisions.