Examining risk in the financial industry services and the impact of Dodd-Frank Law on risk

Gergana Yankova


The purpose of this event study is to examine if the Dodd-Frank Law lowered systemic risk in the financial industry sector. To find out the effect of the legislation on risk, I first calculated risk levels in the financial industry before and after the implementation of the law and after that constructed a regression estimation function where total risk is represented as a function of the following independent variables: equity capital to assets, noninterest income to assets, return on equity, total risk-based capital ratio and 10-year Treasury yield. All the explanatory variables represent cash flow turnover for the bank and nonbank financial institutions. The study is outlined in two periods: pre-Dodd-Frank period and post- Dodd-Frank period, where the separation point of the periods is July 21st, 2010. The output of the regression analysis, which estimates parameters through ordinary least squares, shows lower risk levels in the post-Dodd-Frank period, which suggests that Dodd-Frank lowered systemic risk in the financial industry.