Where the ‘Too Big to Fail’ Debate Stands
By Ryan Tracy
Do large banks have an advantage over small banks because of the perception they are “too big to fail”? Answering that question is tougher than it sounds, as many government agencies, academics, and consultants have learned in their attempts to study the issue since Washington bailed out the banks to forestall economic calamity in 2008. Critics say big banks enjoy an implicit subsidy and lower funding costs by virtue of being so big that the U.S. would never allow them to fail. Defenders of big banks say any funding advantage is shrinking or has disappeared, and that higher regulatory costs negates any funding advantage. Resolving the debate is crucial for Wall Street’s titans: If they are still “too big to fail” even after the 2010 Dodd-Frank financial overhaul law, then stricter rules forcing them to break up may be in the offing. On Thursday, the Government Accountability Office, a watchdog agency that works for Congress, will release a report aimed at quantifying how much of a subsidy big banks enjoy,
though its conclusions
probably won’t end the debate. Ahead of a hearing on that report Thursday afternoon, here’s a primer on what other relevant research has found. Federal Financial Analytics, July 2014, Looked At: The other side of the equation: Costs that banks have incurred as a result of post-crisis regulatory changes, as represented in public filings. Found: Six of the top U.S. banks incurred $70.2 billion in costs as a result of four
measurable changes: Increased capital requirements, restrictions on debit card fees, deposit insurance premiums, and fees paid to fund supervision. Caveat: The study didn’t include regulatory costs that the banks don’t quantify in public filings, like the Volcker rule. The Financial Services Forum — which represents the chief executives of the nation’s biggest banks and financial firms — commissioned the study. FedFin, a Washington, D.C.-based policy analysis firm, said it reached its own conclusions without any input from the
bank group.