Measured the change in Trading Asset Ratio (TAR) in Bank Holding Companies after Volcker Rule is imposed after 2008 Financial Crisis with Difference-in-Difference (DiD) Technique.
Difference-in-Difference (DiD), Propensity Score Matching, Regression Robustness Test, Linear Regression
The 2008 financial crisis was considered by many as the worst financial crisis since the Great Depression due to its ripple effects worldwide. Following the crisis, the U.S market regulators scrambled to impose strict regulations on the financial sector to maintain risk level. The Volcker Rule (TVR) was deployed as a part of the most important regulations, the Dodd-Frank Act (DFA), to restrict banks’ risky activities and reduce risk-taking by banks - specifically focusing on limiting proprietary trading and investments.
This project aims to analyse the effectiveness and impact of TVR on U.S Bank Holding Companies (BHC). To quantify the impact, the change in Trading Asset Ratio (TAR) before and after the TVR announcement in 2010 was measured. TAR is expected to decrease if TVR is effective as banks would decrease risky trading activities. Four robustness tests were introduced to ensure that baseline model holds when some assumptions are tweaked.
The dataset used was of the 2,473 BHCs selected financial data - mostly from balance sheet and income statement. The dataset has went defunct or they were newly established). The data was filtered according to the models adopted.
There exists a limitation to this report. The time period covered in this report ends in Q2 2015; TVR has not been fully rolled out by then. As such, there might be other long term effects which could not be observed in this report.
Our findings indicated that TVR indeed reduced trading activities as we saw a reduction of TAR. However, this does not necessarily reflect a reduction in risks. BHCs can simply increase the riskiness of the permitted trading activities, as the line between the permitted and proprietary trading is not clearly defined in TVR. An example could include using privately owned investment firms to carry on proprietary trading. As such, we propose suggestions whereby regulators could potentially increase TVR effectiveness below.
Kyle Kenji Asano (@kasano)
Widya Salim (@salimwid)
Sae Jin Jang (@saejin123)
Hpone Myat Khine (@HponeMK)
Amy Mingxuan Yang (@mingxuanyang-amy)