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Removing the arbitrary size designation for bank SIFIs would reduce costly regulation for regionals, encourage industrywide competition and concentrate regulators' efforts on firms that actually warrant attention.
August 6 -
The GAO should focus on the gross benefit of being "too big to fail", not the benefit net of fines, penalties and regulatory burdens.
September 24
The Government Accountability Office soon will release its study assessing the subsidy of the biggest U.S. banks. Lets hope it does a better job than Bloomberg.
Earlier this year, Bloomberg editors
The $83 billion statistic has been widely cited in congressional testimony and op-eds by industry experts such as
Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., introduced legislation to eliminate government subsidies enjoyed by trillion-dollar megabanks, citing the $83 billion advantage.
Unfortunately, repeating a statistic doesnt make it true. In reality, the biggest banks in the U.S. are probably operating close to a $14 billion disadvantage annually. The difference can be explained by a slip of the pen by Bloomberg and the cost of 398 new rules from the Dodd-Frank Act.
Bloombergs estimate was based on a
The $83 billion estimate may or may not accurately describe banks funding conditions during the worst economic collapse since the Great Depression. But it certainly is not the annual funding advantage of large banks, as implied by Bloomberg.
Historically, there are huge differences in bank funding levels during economic crises and normal times. Moodys
During 2007 to 2009, the funding advantage grew for banks in nearly all developed countries. The IMF reports that the largest 10 banks in each G20 country had, on average, a 65 basis point funding advantage during the peak of the crisis. The Center for Economic Policy Research estimates that the difference in the cost of funds between large and small U.S. banks
After the crisis ended, the funding advantage began to shrink. Anthony Haldane, executive director of financial stability at the Bank of England,
For the sake of argument, lets assume the big bank funding advantage returns to its historic average. Following Bloombergs approach, multiplying 20 basis points the official IMF estimates post-crisis by the liabilities of the ten largest U.S. banks generates a subsidy estimate of roughly $20 billion. This is still a considerable amount, but a fraction of the crisis-level estimate.
But wait. Standard & Poors
Its hard to feel bad for big banks losing money. However, it is important to balance the funding cost advantages of large banks against the government-imposeddisadvantages when deciding policy adjustments to level the playing field so banks of all sizes can compete freely.
Additionally, there remains this nagging question about where the funding advantage actually comes from. Most academic literature concludes it is very difficult to isolate if large financial institutions have lower cost of funds from competitive advantages, such as more liquidity, diversification, government support or something else. Across all industries not just banking the largest companies tend to have a lower cost of funds than their smaller counterparts. It would be a mistake to frame policies that intentionally impose additional costs on large banks that offset market-derived competitive advantages.
Hopefully, the GAO report brings more clarity to the size, fluctuation and source of the subsidy. As of now, there are plenty of reasons to reform the U.S. banking industry. An $83 billion subsidy estimate should not be one of them.
Abby McCloskey is program director of Economic Policy at the American Enterprise Institute. She was a staffer for Senator Richard Shelby during financial reform and director of research at the Financial Services Roundtable.