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

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  • Adam B. Ashcraft

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.

Suggested Citation

  • Adam B. Ashcraft, 2004. "Are bank holding companies a source of strength to their banking subsidiaries?," Staff Reports 189, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:189
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    References listed on IDEAS

    as
    1. 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.
    2. Ashcraft, Adam B., 2006. "New Evidence on the Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 751-775, April.
    3. Anthony Cornyn & Gerald A. Hanweck & Stephen A. Rhoades & John T. Rose, 1986. "An analysis of the concept of corporate separateness in BHC regulation from an economic perspective," Proceedings 107, Federal Reserve Bank of Chicago.
    4. Mark J. Flannery, 1986. "Contagious bank runs, financial structure and corporate separateness within a bank holding company," Proceedings 108, Federal Reserve Bank of Chicago.
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    Keywords

    Bank holding companies ; Bank capital ; Financial Institutions Reform; Recovery; Enforcement Act of 1989 ; Federal Deposit Insurance Corporation;

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