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Regulatory policies on Gramm-Leach-Bliley consolidation of commercial banking, shadow banking, and life insurance

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  • Lin, Jyh-Horng
  • Li, Xuelian

Abstract

This paper takes a contingent claim approach to the market valuation of equity and default risk in a financial services holding company eligible to consolidate commercial banking, shadow banking and life insurance under the Gramm-Leach-Bliley Act (GLBA) of 1999. We find a case where the GLBA consolidation destroys value captured by scope disequities. Four main results are demonstrated. First, bank capital requirement enhances a likelihood of bankruptcy and destroys value for the consolidated bank. Second, an increase in the regulatory guaranteed interest rate of the life insurance policy increases the default risk and decreases value for the consolidated bank. Third, on the contrary, the regulatory participation rate enhances the survival probability and value for the consolidated bank. Finally, our findings sound a cautionary note to adoption of regulatory mechanisms that may discourage functional consolidation of the GLBA.

Suggested Citation

  • Lin, Jyh-Horng & Li, Xuelian, 2017. "Regulatory policies on Gramm-Leach-Bliley consolidation of commercial banking, shadow banking, and life insurance," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 50(C), pages 69-84.
    • Handle: RePEc:eee:intfin:v:50:y:2017:i:c:p:69-84
    DOI: 10.1016/j.intfin.2017.09.005
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    More about this item

    Keywords

    Scope equities; Shadow-banking entrusted loan; GLBA;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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