Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries?

32 Pages Posted: 23 Sep 2004

Date Written: June 2004

Abstract

I present evidence that the cross-guarantee authority granted to the FDIC by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 has unexpectedly strengthened the Federal Reserve's source-of-strength doctrine. In particular, I find that a bank affiliated with a multi-bank holding company is significantly safer than either a stand-alone bank or a bank affiliated with a one-bank holding company. Not only does affiliation reduce the probability of future financial distress, but distressed affiliated banks are more likely to receive capital injections and recover more quickly than other banks. Moreover, the effects of affiliation are strengthened for an expanding bank holding company. However, the effects of affiliation are weakened when the parent has less than full ownership of the subsidiary. Most interestingly, my results show that these differences in behavior across affiliation did not exist before 1989, when the cross-guarantee authority was introduced.

Keywords: cross-guarantee provision, source-of-strength doctrine, bank capital regulation

JEL Classification: G21, G28, G32

Suggested Citation

Ashcraft, Adam B., Are Bank Holding Companies a Source of Strength to Their Banking Subsidiaries? (June 2004). FRB of New York Staff Report No. 189. Available at SSRN: https://ssrn.com/abstract=594882 or http://dx.doi.org/10.2139/ssrn.594882

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045-0001
United States
212-720-1617 (Phone)
212-720-8363 (Fax)

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