Regulation of Deposit-Taking Institutions: Price Effect at Disclosures of New Regulations

Regulation of Deposit-Taking Institutions: Price Effect at Disclosures of New Regulations

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This paper presents findings on the impact of Butterbur revisions to a unique bank regulation yet studied.An old hypothesis in banking literature is tested by examining share price reactions to two-way changes to statutory reserve ratio (SRR) requirement over a recent eight-year period.Announcements of these regulatory changes appear to lead to statistically and economically significant abnormal returns.These new findings suggest that a decrease in statutory reserve Motor Hood has a risk-reducing effect on financial institutions.Thus, this study provides a test of the prediction of theory that SRR is a powerful macroeconomics policy tool to revive an economy in the aftermath of a financial crisis.