Assessing the impact of regulatory reforms on the market value of retail banks in the UK, employing an event study methodology.

Amuah, Donald and Amadi, Chibuzo and Telford, Brian (2024): Assessing the impact of regulatory reforms on the market value of retail banks in the UK, employing an event study methodology.

Abstract

This study examines the impact of two significant regulatory reforms, the Banking Reform Act (2013) and the Financial Services and Markets Act (2023), on the market value of the four largest retail banks in the UK. The study aims to assess how these reforms, designed to enhance financial stability and consumer protection, affected the stock returns of these major financial institutions. The research employs an event study methodology, a well-established approach in financial economics, to analyse the stock market reactions to key legislative events associated with the enactment of both acts. The study focuses on three critical stages in the legislative process: the third reading in the House of Commons, the third reading in the House of Lords, and the Royal Assent. Daily stock price data from 2000 to 2023 is used to calculate abnormal returns, which are then analysed for statistical significance using the Wilcoxon signed-rank test. The findings reveal that the Banking Reform Act 2013, while not significantly impacting individual bank returns, had a collective negative effect on the stock prices of the four banks. This suggests that the market perceived the reforms as potentially reducing bank profitability due to increased regulatory burdens and structural changes. Conversely, the Financial Services and Markets Act 2023, enacted a decade later, showed a positive and significant effect on the collective stock returns of the banks. This indicates a more favourable market sentiment towards the post-Brexit regulatory framework, potentially due to its focus on maintaining the UK's competitiveness as a global financial centre while ensuring stability. This study contributes to the limited literature on the impact of regulatory reforms on UK banks, particularly in the context of the post-2008 financial crisis landscape and the UK's departure from the European Union. The findings offer valuable insights for policymakers, regulators, and investors by highlighting the nuanced market reactions to different regulatory approaches. The study underscores the importance of considering both short-term and long- term market implications when designing and implementing financial reforms.

• Item Type: MPRA Paper
• Language: English
• Keywords: bank regulation, retail banks, stock market value, Banking Reform Act (2013), Financial Services and Markets Act (2023), event study methodology.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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