Safety-Net Losses from Abandoning Glass-Steagall Restrictions

This paper evaluates the redistribution of gains surrounding regulatory relaxations in 1996 and 1997 and ultimate passage of the Financial Services Modernization Act (FSMA) of 1999. Gains in financial institution stocks may come from projected increases in efficiency, increases in the bargaining power of financial institutions, or greater access to the federal safety net. For customers seeking greater access to capital markets, gains in efficiency should result in increased benefits, but increases in bank bargaining power could increase funding costs and/or decrease capital market access. Customers may also lose as taxpayers who support the federal safety net. This paper finds evidence of potential taxpayer losses and increased bank bargaining power, especially vis-a-vis credit-constrained customers for whom safety-net subsidies are unlikely to be shifted forward. The stock prices of credit-constrained customers declined during FSMA event windows and in event windows associated with regulatory relaxations