Assessing the introduction of
anti-money laundering regulations
on bank stock valuation
An empirical analysis
University of Wisconsin Whitewater, Park Ridge, Illinois, USA
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
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
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.,
Journalof Money Laundering
Vol.22 No. 1, 2019
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