Impact of the Volcker Rule on Bank Valuations and Risk

We find that events signaling that the Volcker Rule would impose heavy restrictions on bank proprietary trading had a pronounced negative impact on money center banks, irrespective of whether the London Whale events (reflecting large proprietary trading losses by J.P. Morgan Chase) are included. The money center banks also experienced negative valuation effects in response to the London Whale events. Other types of banks experienced non-significant valuation effects in response to Volcker Rule events, but all banks experienced a reduction in risk in response to the first event signaling the impending development of the Volcker Rule. We attribute these results to a possible change in the perception of the banking industry, in which investors are more confident that bank risk-taking will be constrained within reasonable limits in the future. Furthermore, we find that the degree of risk reduction following the first event signaling the development of the Volcker Rule is more pronounced for banks that were larger, and that previously exhibited high volatility.