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The Sarbanes-Oxley Act and the U.S. banking industry: the increasing divergence of return on assets and return on equity between registered and nonregistered banks began significantly in 2002.
Can the effect on the U.S. banking industry of the Sarbanes-Oxley Act of 2002 (SOX) be measured? Many U.S. banks fall under the mandates of the Securities and Exchange Commission (SEC). Some do not. By comparing the operating results of these two classes of banks during the period that SOX has been in place, a difference may become apparent.
Research Method
Bank data for all U.S. banks for the years 2000 through 2005 was obtained from the Federal Reserve archives. The data included total assets, return on assets (ROA), return on equity (ROE). The data was segregated for those banks that must register with the SEC and thus fall under SOX reporting regulations, "registered banks," and banks that are not required to register with the SEC, "nonregistered banks." The means and medians of the ROA and ROE for registered banks and nonregistered banks were calculated for each year, 2000 through 2005.
Exhibits 1 and 2 depict mean ROA and ROE for nonregistered versus registered banks. As Exhibits 1 and 2 show, there is a significant divergence in ROA and ROE between the registered and nonregistered banks beginning in 2002 and continuing through 2005. The nonregistered banks, those that are not required to follow mandates of SOX, have higher ROAs and ROEs beginning in 2002. By 2005, the average ROE for nonregistered banks is almost two percent higher than that of the registered banks.
As indicated in Exhibits 1 and 2, the mean ROA and ROE begin to significantly diverge in 2002. The downward trend in the mean ROE and ROA for registered banks begins in 2002 but has a slight uptick in 2005.
To compare how SOX affected the variances of bank ROAs and ROEs, four hypotheses are presented. The variances of ROAs and ROEs for the year 2000 are compared to 2005, after SOX was enacted. The first hypothesis tests to see if the variances of registered banks' 2000 ROA is equal to the 2005 ROA.
[H.sub.01]: The variance of the registered banks' 2000 ROA is equal to the variance of the 2005 ROA.
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