Abstract
This study investigates the impact of regulatory reforms on UK retail banks, specifically examining the effects on stock market value, technical efficiency, and profitability. Using a mixed-methods approach, the study analyses the Banking Reform Act (2013) and the Financial Services and Markets Act (2023), focusing on the top four UK banks (Lloyds Banking Group, Barclays Bank Plc, NATWEST Plc, and HSBC Bank) as at the 1st of June 2023. The study examines the impact of regulatory reforms on bank technical efficiency. A two-stage Data Envelopment Analysis (DEA) is conducted, utilizing both an input-oriented Banker, Charnes, and Cooper (BCC) model under Variable Returns to Scale (VRS) and Malmquist Index estimations to account for changes over time. In the second stage, robust fixed effects panel regression analysis is employed to identify the drivers of efficiency, including total loans, risk-weighted assets, total deposits, and macroeconomic factors. Results reveal that while US banks are slightly more efficient on average, UK banks demonstrate responsiveness to regulatory changes. The findings suggest that less restrictive regulations could enhance efficiency, although a trade-off between bank soundness and efficiency may exist.The study further assessed the stock market's reaction to these regulatory reforms. An Event Study Methodology (ESM) is employed, using the market model (Single Index Model) to calculate abnormal returns and test their statistical significance. The study analyses cumulative average abnormal returns (CAARs) and unsystematic risk over three event windows (3-day, 5-day, and 10-day) for six key legislative events. Findings reveal mixed reactions, with the Banking Reform Act (2013) generally associated with negative but insignificant effects on individual bank returns, while the Financial Services and Markets Act (2023) is linked to positive and significant effects. These differential reactions underscore the importance of phased implementation and clear communication of regulatory changes. An analysis of the impact of regulatory reforms on bank profitability, using fixed and random effects panel regressions was conducted. Return on Assets (ROA), Return on Equity (ROE), and Net Interest Margin (NIM) are modelled as dependent variables, with liquidity and capital ratios (proxies for regulatory measures) as independent variables, controlling for macroeconomic factors. The results indicate a positive association between liquidity regulation and all three profitability measures, suggesting that tighter liquidity regulation can enhance profitability. Conversely, the impact of capital regulation is mixed, with total capital positively associated with profitability but Tier 1 capital negatively impacting it.
This study provides comprehensive insights into the multidimensional impact of regulatory reforms on UK retail banks. The findings emphasise the need for a nuanced and balanced regulatory approach, tailored to specific bank characteristics and market conditions. Regulators should consider the potential trade-offs between stability, efficiency, and profitability when designing and implementing regulatory frameworks. Banks, in turn, should adopt proactive strategies for adapting to regulatory changes, focusing on liquidity and capital management, as well as engaging in transparent communication with stakeholders. This research contributes to the existing literature on bank regulation and its economic consequences, offering valuable insights for policymakers, regulators, and industry practitioners. The findings have important implications for the design of future regulatory reforms in the UK and beyond, emphasising the need for evidence-based policymaking that promotes a stable, efficient, and profitable banking sector.
Date of Award | 2025 |
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Original language | English |
Supervisor | Chibuzo Amadi (Supervisor) & Brian Telford (Supervisor) |
Keywords
- Bank Regulation
- Retail Banks
- Stock Market Value
- Technical Efficiency
- Profitability
- Banking Reform Act (2013)
- Financial Services and Markets Act (2023)
- Fixed and Random Effects Panel Regress
- Data Envelopment Analysis (DEA)
- Event Study Methodology (ESM)