THE IMPACT OF THE FEDERAL-RESERVE SOURCE OF STRENGTH POLICY ON BANK-HOLDING COMPANIES

This study examines the impact of the establishment of the Federal Res erve's source of strength policy on bank holding companies (BHCs). No significant change in share price or systematic risk was detected for BHCs with all healthy bank subsidiaries. In contrast, those BHCs with financially troubled bank subsidiaries experienced declines in share p rice and increases in systematic risk coinciding with the establishmen t of the policy. In addition, it was found that the negative wealth ef fect was detected in connection with the Fed's charge against Hawkeye Bancorp of failing to serve as a source of strength and not in respons e to its subsequent source of strength policy statement.