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We examine the credit card cap bill of November 1991. This legislation took only six business days to be formulated, pass in the Senate, and then die unenacted. We find that banks with high credit card exposure experienced significant negative abnormal returns during the period in which the bill looked certain to be enacted. When it became evident that the bill would fail, the banks did not recoup the full value lost.

* Recent finance literature has examined the impact of several regulatory events. One difficulty with these studies is that information tends to develop over a sometimes lengthy period of time. For example, Congress debated and revised the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 over an eight-month period (see Sundaram, Rangan, and Davidson, 1992) and the FDIC Improvement Act (FDICIA) of 1991 over a 13-month period (see Chen, Cornett, Mehran, and Tehranian, 1998). Risk-based deposit insurance called for in FDICIA took Congress another nine months to debate (see Cornett, Mehran, and Tehranian, 1998). As of July 1999, Congress continues (after more than three years of debate) to consider the Leach Bill, legislation that would repeal sections of the Glass-Steagall Act. Such lengthy periods of review, revision, and debate make it difficult to pinpoint a clear event date for studies involving regulatory events.

In contrast to most legislative action, credit card interest-rate-cap legislation, which initially called for a cap of credit card interest rates of 14%, took only six business days in November 1991 to be suggested, see overwhelming Senate passage, and die unpassed. Therefore, this legislation presents an opportunity to examine a clearly identifiable event date of an issue that was a clear "surprise" to the financial markets.

In this paper, we use traditional event-study methods to examine the stock returns for bank holding companies over the six- (business) day period associated with credit card cap legislation, and in particular, how banks' reactions depended on their credit card exposures.

The results of the study indicate that during the period in which credit card cap legislation appeared to be imminent (November 12 through November 15, 1991) bank holding companies experienced significant negative abnormal returns that were related to the size of their credit card receivables and their credit card risk exposure. When it became evident that the credit card legislation would fail, the banks did not recoup the full value lost. It appears that the surprise involved in this legislation left a lasting impact on bank values. Despite the demise of this particular piece of credit card cap legislation, the market appears to have impounded this surprise permanently in the form of loss in value, possibly in anticipation of further attempts at such regulation (that no longer would be quite the unexpected event).

The paper is organized as follows. Section I discusses the events that took place while Congress debated the credit card interest-rate-cap legislation. Section II describes the data and methodology used in the empirical tests. Section III presents the results, and Section IV concludes the paper.

I. Chronology of Events and Their Expected Impact on Bank Stock Prices

In this section, we outline the series of events over the six- (business) day period from Tuesday, November 12 through Tuesday, November 19, 1991. Because stock price values are affected by other macroeconomic events, we also summarize other macroeconomic-oriented news events that occurred on each of the six days. Both categories of events are listed in Table 1.

On Tuesday, November 12, 1991, during a fundraising luncheon in New York, President George Bush suggested that the economy would recover faster from recession if banks reduced their credit card rates commensurate with other rate declines throughout the economy. [1]

Wednesday's Wall Street Journal quoted several consumer advocate and credit card watchdog groups as doubting that the Bush comments would spur banks to make any changes.

On the same day, the Wall Street Journal (WSJ) reported a one-point gain in 30-year Treasury bonds and attributed it to strong overseas demand. The Standard and Poor's (S&P) 500 rose 0.92%, and the S&P Financials increased 0.68%. The 90-day T-bill rate remained constant at 4.62%.

The next day, Senator Alfonse D'Amato introduced a bill in the Senate to cap credit card interest rates at 4% over the rate the Internal Revenue Service charges on unpaid taxes. Based on rates at that time, the cap would have been set at 14%, compared with the average of 18.94% charged by credit card issuers. The bill, which came as a complete surprise, breezed through the Senate by a 74-19 vote late Wednesday afternoon (although the story did not cross the Dow Jones News Wire until 7:32 a.m. Thursday). The administration backed away from the bill. On Wednesday night, President Bush said that cutting credit card rates "... isn't a government decision."

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