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Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace, 8/e

Peter Rose, Texas A & M University

The Regulation of the Financial Institutions Sector

Standard & Poor's Questions

Chapter 18 in Money and Capital Markets: The Regulation of the Financial Institutions’ Sector

Question 1

Which businesses in the S&P Market Insight list are among those most critically affected by the terms of the Gramm-Leach-Bliley (Financial Services Modernization) Act of 1999?

Question 2

In recent years some economists interested in the financial sector have focused upon a concept called the “regulatory effect.” The basic idea is that heavily regulated firms (such as commercial banks) tend to have lower average earnings or profitability than less heavily regulated firms (such as security brokers); however, correspondingly, the more heavily regulated companies tend to have more stable returns than those facing less regulation. Thus, the “regulatory effect” contends that government regulation tends to reduce or hold down average rates of return but compensates for this impact, at least partially, by promoting greater stability in earnings. See if you can find some evidence consistent with the “regulatory effect” by looking at some financial firms with varying regulatory burdens in the S&P Market Insight list. Two useful examples might be the closely regulated Bank of New York (BK) versus the more lightly regulated Schwab (Charles) Corporation (SCH). Do these two companies seem to reflect the “regulatory effect”? Are some of their recent financial reports not consistent with the “regulatory effect”?

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