Assessing the introduction of anti-money laundering regulations on bank stock valuation. An empirical analysis
| Date | 07 January 2019 |
| Pages | 76-88 |
| DOI | https://doi.org/10.1108/JMLC-03-2018-0021 |
| Published date | 07 January 2019 |
| Author | Henry Balani |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation,Financial crime |
Assessing the introduction of
anti-money laundering regulations
on bank stock valuation
An empirical analysis
Henry Balani
University of Wisconsin Whitewater, Park Ridge, Illinois, USA
Abstract
Purpose –This paper aims to analyze the impact of the introduction of anti-money laundering (AML)
regulationson bank stock valuations in the USA. Regulations can have a negativeimpact on financial returns
as a result of increased operational costs, potentiallydriving down stock valuations and loss of profitability.
However, regulations can also have a positive impact on valuations because of greater oversight and
increasedinvestor confidence. Findings are useful for assessing the marketimpact of future regulations.
Design/methodology/approach –Event studies and cross-sectional regression analysis are used to
determine the impact on bank stock valuations together with specific characteristics of bank size and
geographic headquarterlocation of the bank for identified AML regulations. Hypothesisrelated to the impact
of the introduction of AML regulations are empirically tested based on the statistical significance of
cumulativeabnormal returns of markets.
Findings –AML regulations introduced in 1998 had a positive impact on bank stock valuations, while
the USA PATRIOT Act legislation of 2001 had a negative impact. These findings suggest that recent
AML regulation is a cost c ompliance burden for banks, where the cos ts of operations outweigh the
benefits of improved processes. Larger banks see a more negative impact on their bank stock valuations
compared to smaller banks, suggesting the market perceives greater cost and less profit for larger banks.
Results also show that the location of bank’s headquarters does not significantly impact bank stock
valuations.
Originality/value –This paper specificallyfocuses on the impact of AML regulations on the US banking
sector, providing investors, academics and regulators additional insight on the market dynamics of
regulations. Identifying whether the introduction of regulations has a significant impact on a bank’s
performance will provideboth banks and regulators clarity as to the net benefitsassociated with the current
and future AML legislation.
Keywords AML, Bank performance, Bank profitability, Regulations
Paper type Research paper
1. Introduction
Banks play a vital role in the global economy, facilitating the movement of funds and
providing the infrastructureby which financial transactions are settled between two parties.
They act as the “gatekeepers”of the legitimate financialsystem (Pramod, 2015). Banks play
a vital role in an economy, providing financial servicesto commerce that stimulates growth
(Kashyap and Stein, 1997). Banks havehowever been known to propagate financial crisis in
an economy if not well regulated (Mehand Moran, 2010). A bank needs to be seen as reliable
with healthy valuations, acting as an essential partner in the conduct of monetary policy,
providing capitalliquidity as required (Diamond and Rajan, 2000). As a result, banks tend to
be heavily regulated to ensure there is no unnecessary risk-taking (Bhattacharya et al.,
1998).
JMLC
22,1
76
Journalof Money Laundering
Control
Vol.22 No. 1, 2019
pp. 76-88
© Emerald Publishing Limited
1368-5201
DOI 10.1108/JMLC-03-2018-0021
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