US banks push back against 'too big to fail' funding assumptions

The banking industry is fighting back against recent studies showing the largest companies still enjoy funding advantages because of the perception they are "too big to fail", which assumes a government bailout in a crisis.

The Clearing House Association, a US bank trade group representing JPMorgan Chase, Citigroup, Bank of America and other institutions, on Thursday released the findings of an independent study it commissioned, which showed that funding advantages for the largest banks had disappeared by 2013.

The differing views on whether too big to fail still exists remains a controversial issue, five years after the financial crisis. Bank critics, including some US lawmakers, use too big to fail studies showing continuing subsidies as reasons to push for greater capital requirements or a break-up of the biggest banks.

The latest study, conducted by consultancy Oliver Wyman, largely attributed the disappearance of the funding advantages for the largest banks to increased regulation, such as higher capital requirements, which has reduced the perception of too big to fail. The research showed that the cost-saving advantage of the largest banks in bond sales over their smaller peers was at 137 basis points in 2009, but that fell to 8 basis points in 2013.

On March 31, the International Monetary Fund warned that the world's largest banks still received implicit public subsidies worth as much as $590bn because of their status as too big to fail.

Also in March, the Federal Reserve Bank of New York said the largest US banks have benefited from a significant funding advantage over their smaller competitors, enjoying an extra $60m-$80m of cost savings per average new bond sale over their smaller rivals until 2009.

The Oliver Wyman study criticised the NY Fed research because it did not include 2013 bond spreads, while the IMF study did not consider a range of bond-specific characteristics that contribute to spread differences. The Clearing House version measured differences in market spreads from 2009 to 2013 for senior unsecured bonds issued by the largest US bank holding companies.

"These findings are consistent with what other independent studies looking at the most recent period have found: funding cost differences have narrowed precipitously and significantly in the years following financial regulatory reform," said Bob Chakravorti, chief economist at the Clearing House. "The fact that the differential has essentially disappeared by 2013 suggests quite convincingly that the reforms are taking hold and dramatically changing market perceptions of risk and funding costs today."

The research comes ahead of a widely anticipated too big to fail subsidies study this year from the Government Accountability Office, which was commissioned by Democratic and Republican senators, Sherrod Brown and David Vitter. They have introduced a bill to impose higher capital requirements on the largest banks.

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