The Value Effect of Financial Reform on U.K. Banks and Insurance Companies

Abstract

In response to the financial crisis, a number of reforms to bank regulation have been introduced. Many of these reforms seek to improve the resilience of banks through making changes to their structure. In the U.K., the Banking Reform Act 2013 was enacted. This study attempts to examine the market’s reaction to this important financial reform, on the stock price of banks and insurance companies and contributes to the current regulatory debate. As reform proposals take time to get converted into Law, this paper focuses on three legislative events extracted from the Parliament website; the third reading at the House of Commons, the third reading at the House of Lords, and the Royal Assent, effectively the stages from which reform proposals convert to Law. This study employs an event study methodology, based on a sample consisting of 24 major banks and insurance companies listed on the London Stock Exchange (LSE) for which data are available from 30/11/2012 to 18/12/2013 covering all three events. The findings are that banks’ shares reacted positively, whereas insurance companies’ shares reacted negatively to the passage of the Banking Reform Act 2013 in the House of Commons (first event); insurance companies experienced negative returns, whereas banks’ returns did not react significantly in relation to the passage of the Act in the House of Lords (second event); and finally, banks’ shares reacted positively while insurance companies’ shares reacted negatively when the Act received the Royal Assent (third event). One of the main intentions of the Banking Reform Act 2013, was to contain the risk taken by banks. Market reaction on banks’ shares shows that the market accepted this; on the other hand, the negative effect on the shares of insurance companies would imply that insurance companies are perceived to have taken on some additional risk as a consequence of the Act.