Financial Modernization Act - Enterprise value and Reputation

The Financial Service Modernization Act of 1999 has been crucial to the financial service industry ever since its creation. There are two primary reasons this Act was mandated to aid the financial service industry- the merger/barrier reason and consumer privacy reason. This paper evaluates whether this policy has achieved this object and how the effect the policy has had on the financial service industry compares to the non-policy effect on wholesale trade industry, retail trade industry and service industry. This paper finds that this policy is one of the significant reasons, If not the primary reason, for the increase in the Enterprise Value (EV) of firms within the financial service industries over the industries. Furthermore, the findings suggest that customer complaints may have lessened within the financial service industries more than Wholesale and Retail trade industries but not the service industries.

Diversification in the Financial Services Industry: The Effect of the Financial Modernization Act

The intent of the Financial Services Modernization Act of 1999 (FSM) was to strengthen the overall financial services sector by allowing financial firms to diversify across industries within the financial sector. Similar to other studies of the reaction to this Act, we observe that investors consider the FSM to be good news. More interestingly, we also observe that systematic risk increased for some types of firms, but decreased for others as barriers were lowered. This finding is consistent with the idea that the reduction of regulation may increase systematic risk, but that the effects of deregulation on risk may be mitigated by anticipated effects of diversification. Specifically, bank holding companies that chose to diversify into other financial industries experienced increases in systematic risk while those that did not diversify realized decreases in systematic risk. Overall, we find that the systematic risk of financial firms converged and increased in the past few years as firms expanded into non-traditional businesses. In addition, we find that the Act reduced systematic risk for some firms, specifically those that diversified their product lines with insurance products.