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Are bank holding companies a source of strength to their banking subsidiaries?

  • Adam B. Ashcraft

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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 189.

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Date of creation: 2004
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Handle: RePEc:fip:fednsr:189
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  1. Mark J. Flannery, 1986. "Contagious bank runs, financial structure and corporate separateness within a bank holding company," Proceedings 108, Federal Reserve Bank of Chicago.
  2. Adam B. Ashcraft, 2005. "Are Banks Really Special? New Evidence from the FDIC-Induced Failure of Healthy Banks," American Economic Review, American Economic Association, vol. 95(5), pages 1712-1730, December.
  3. Adam B. Ashcraft, 2001. "New evidence on the lending channel," Staff Reports 136, Federal Reserve Bank of New York.
  4. Anthony Cornyn & Gerald Hanweck & Stephen Rhoades & John Rose, 1986. "An analysis of the concept of corporate separateness in BHC regulation from an economic perspective," Proceedings 107, Federal Reserve Bank of Chicago.
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