Assessing the introduction of anti-money laundering regulations on bank stock valuation. An empirical analysis

Author:Henry Balani
Position:University of Wisconsin Whitewater, Park Ridge, Illinois, USA
Pages:76-88
SUMMARY

Purpose This paper aims to analyze the impact of the introduction of anti-money laundering (AML) regulations on bank stock valuations in the USA. Regulations can have a negative impact on financial returns as a result of increased operational costs, potentially driving down stock valuations and loss of profitability. However, regulations can also have a positive impact on valuations because of... (see full summary)

 
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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 nancial returns
as a result of increased operational costs, potentiallydriving down stock valuations and loss of protability.
However, regulations can also have a positive impact on valuations because of greater oversight and
increasedinvestor condence. 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 specic characteristics of bank size and
geographic headquarterlocation of the bank for identied AML regulations. Hypothesisrelated to the impact
of the introduction of AML regulations are empirically tested based on the statistical signicance 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 ndings suggest that recent
AML regulation is a cost c ompliance burden for banks, where the cos ts of operations outweigh the
benets 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 prot for larger banks.
Results also show that the location of banks headquarters does not signicantly impact bank stock
valuations.
Originality/value This paper specicallyfocuses 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 signicant impact on a banks
performance will provideboth banks and regulators clarity as to the net benetsassociated with the current
and future AML legislation.
Keywords AML, Bank performance, Bank protability, 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 nancial transactions are settled between two parties.
They act as the gatekeepersof the legitimate nancialsystem (Pramod, 2015). Banks play
a vital role in an economy, providing nancial servicesto commerce that stimulates growth
(Kashyap and Stein, 1997). Banks havehowever been known to propagate nancial 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
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1368-5201.htm

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