The Federal Reserve Bank of New York today ended the suspense with which big banks have been awaiting a series of studies on TBTF, concluding that behemoths have market benefit, but also continued TBTF risk. In this report, we assess the FRB-NY papers with policy impact, focusing on those that assess the extent to which the largest BHCs have funding advantages, operating efficiencies and market benefit, as well as those that consider whether – regardless of benefit or subsidy – these BHCs can now be resolved without taxpayer risk. Public attention has been particularly focused on one study, which found an average .41 percent funding advantage even though study authors note that this could in part be due to market factors. We would also note that the data on which this finding is based run only through 2009, prior to enactment of Dodd-Frank and growing market expectations of bond-holder loss. Nevertheless, some of the actual funding disparities are far larger than the average, giving subsidy advocates like Sen. Brown (D-OH) added firepower should the GAO, as expected, conclude its TBTF study (see FSM Report TBTF11) in favor of a subsidy later this spring. The FRB studies also push hard for bail-in debt, proposing a BHC-specific approach based on the amount of runnable liabilities on which the firm relies. It remains to be seen if the pending FRB rule on bail-in debt follows this route and/or includes FRB-NY President Dudley’s recommendation that senior-management compensation also be kicked into the contingent-capital stockpile.
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