The erosion of the Glass–Steagall Act

This paper studies stock price reaction to increased investment banking powers for commercial banks using Seemingly Unrelated Regressions. Market participants react favorably to the announcement of increased Section 20 powers to the Glass-Steagall Act both with and without a risk-shift variable. When the sample is split, abnormal returns are significantly higher for Money Center Banks, banks with prior Section 20 subsidiaries, and Large Regional commercial banks as compared to Small Regional banks. Cross sectional analysis suggests that banks with prior Section 20 subsidiaries have higher abnormal returns and Small Regional banks have lower abnormal returns than the average bank in the sample. Keywords: Glass-Steagall Act; Section 20 subsidiaries