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An obscure bill in the House would go a long way to protect taxpayers by giving megabanks an incentive to deleverage and shrink. So why has it gone nowhere?
March 27 -
Without meaningful transparency on banks financial reports, regulatory capital ratios and living wills, anyone writing about bank earnings is a willing actor in banks quarterly earnings Kabuki theater.
April 17 -
There are five major changes in Basel's latest guidelines that significantly impact its leverage ratios denominator, potentially leaving banks significantly undercapitalized in the event of an unexpected loss and endangering our economy.
January 13
Are the nation's biggest banks still receiving government subsidies six years after the crisis? Two recent studies by the
But some argue that quantifying the subsidies that banks receive is hardly the most important issue. Global systemically important banks, or G-SIBs, continue to have very large challenges in the areas of credit, market, operational and liquidity risks. That's what regulators, policymakers and the media should be focusing on.
I have long felt that it is very difficult to measure subsidies precisely, especially since the types and amounts of data inputs used in these measurement models - including yields, credit spreads and ratings - will influence the results in varied ways. Patrick Sims, director at Hamilton Place Strategies, a policy and public affairs consulting firm, argues that "it is important to measure the subsidy with data since the Dodd-Frank Act was passed."
There is "no question there was a subsidy before crisis," Sims says. But with Dodd-Frank, he says, it is "against the law to bail out a bank. No politician would bail out a bank now."
Paul Saltzman, who oversees the legal, compliance and litigation functions at The Clearing House, has criticized the Fed study's methodology, arguing that it "was irrelevant since the data used were bond yields before the crisis."
Wayne Abernathy, the American Bankers Association's executive vice president of financial institutions policy and regulatory affairs, points out that "everyone will critique each other's methodology to measure any too-big-to-fail subsidy."
While it may be difficult to quantify the size of subsidies, Abernathy argues that "there is a consistent trend in all the studies. Whatever advantage existed, the more recent data show a much smaller advantage, if any at all."
Yet subsidies of any size have the potential to do real harm, as Boston University law professor Cornelius Hurley argues. "A subsidy prevents normal governance from taking place," Hurley says. "It serves as a poison pill and as disincentive to divestitures by making all too-big-to-fail assets worth less outside the TBTF womb."
Like Hurley, I believe that we should investigate the many other benefits that large banks receive, including special terms for collateral, default covenants in long-term debt and more favorable treatment on repurchase agreements. We have already had enough studies measuring the TBTF subsidy. Let's look at all the other benefits that TBTF banks continue to receive that keep them too large to manage, supervise or even to jail.
A bill crafted by Hurley for Representative Mike Capuano,
Admati's concern is that trying to measure the TBTF subsidy may be a distraction from "making banks live in the real world of having more equity the way other corporations do."
Professor Mehrsa Baradaran at the University of Georgia School of Lawconcurs with Admati. "Focusing on measuring the TBTF subsidy is missing the point," she argues. "There is a very strong bank-government partnership. Does banking exist without Fed funding and Federal Deposit Insurance Corp. insurance?"
Even if we manage to measure the subsidy, the whole infrastructure that makes banks so big remains. In their study "
No matter how much time we spend trying to measure the TBTF subsidy, Admati reminds us that the "subsidy studies do not measure banks' distance to default." That's what should keep us up at night.
My own view is aligned with that of Admati: "Large banks cause a lot of collateral damage. Having more equity solves distortions; banks should be charged for the secondhand smoking damage that they cause."
Mayra Rodríguez Valladares is managing principal at