The impact of FDICIA on bank returns and risk: Evidence from the capital markets

This study examines the impact of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 on bank stock returns and risk.. We find that FDICIA had a generally positive effect on bank stock returns and resul ted in a significant reduction in bank risk. The extent of the risk reducti on Varies based on the capitalization, size, and credit risk of the institu tions with poorly capitalized, large, and high credit risk banks experienci ng the greatest risk reduction. The results obtained using two separate con trol groups also bolster the conclusion that FDICIA's passage resulted in a significant decline in bank risk. (C) 2001 Elsevier Science B.V. All right s reserved. JEL classification: G21; G28.