The impact of market contestability on the systematic risk of US bank stocks

Abstract

The implications of contestable-markets theory (CMT) are employed to examine the systematic risk of US bank stocks during 1973–1988, a period spanning deregulatory changes. The implications of CMT lead to an expectation of higher risk after the product innovations and deregulation of the late 1970s and early 1980s. Systematic risk does increase in the later portion of the study. Also in keeping with CMT expectations, banking firms that are in potentially more competitive environments, MBHCs and those with state-wide branching abilities, are found to have higher systematic risk. However, switching regression shows the increase in systematic risk after regulatory and competitive change to be related more to Federal Reserve monetary policy changes than other regulatory moves. Support for CMT is therefore not robust.