Big bank funding advantage erodes, says report

The largest US banks no longer enjoy the same funding advantage from a perception they are "too big to fail", according to a highly-anticipated government report, which has cheered Wall Street and disappointed its critics.

Some lawmakers had hoped the report would prove that the biggest banks were able to borrow more cheaply because of the belief that the government would bail out their creditors during a crisis for fear of damaging the financial system.

Both Democrats and Republicans hoped such a finding would provide an impetus to impose tougher capital charges on the likes of JPMorgan Chase and Bank of America, or even break them up.

But Lawrance Evans, director of financial markets for the Government Accountability Office, which published the report on Thursday, told the Senate banking committee that funding advantages had declined or even reversed since tougher regulations were imposed in the wake of the 2008 crisis.

"Most models we estimated suggest that large bank holding companies had higher bond funding costs than smaller bank holding companies in 2013," Mr Evans said.

The report was requested by subcommittee chairman Sherrod Brown, a Democrat, and Senator David Vitter, a Republican, who have been pushing a bill that calls for higher capital standards for the biggest banks. Wall Street feared the GAO report could be used to help the senators make their case or push for a break-up of the banks.

Parties on each side of the debate pushed their own interpretation of the GAO report, especially since the findings presented a range of funding figures according to various scenarios. The senators focused on findings that showed an implicit subsidy for the biggest banks still exists, and that advantage grows in times of crisis.

They argued that the problem of "too big to fail" still exists, referring to the belief that the government will bail out the largest banks in a future crisis, giving them advantages over their smaller competitors.

"Wall Street lobbyists may try to spin that the advantage has lessened. But if the Army Corps of Engineers came out with study that said a levee system works pretty well when it's sunny - but couldn't be trusted in a hurricane - we would take that as evidence we need to act", the senators said in a statement.

Most of the hearing witnesses, who were mainly academics, attacked the GAO report and said subsidies still exist. Finance professor Edward Kane of Boston College said the GAO "bungled" its assignment by only considering bond costs.

"When implicit guarantee subsidies are provided to institutions that have significant discretion about their investments and the risks they take, the results can be perverse," said Stanford University professor Anat Admati.

Intense lobbying of the GAO by bank critics and their advocates preceded the release of the report, while government officials took into consideration both funding advantages and new regulatory costs. Mr Brown noted the GAO report included three bank-commissioned studies.

A Treasury official said the GAO findings reflect "increased market recognition of what we have consistently said - Dodd-Frank ended "too big to fail" as a matter of law. Of course, regardless of the conclusion of GAO's report, we must remain vigilant on this issue given the evolving nature of our financial system."

This week, the banking industry was already fighting back against expected criticism related to the GAO report. But with the findings backing up some of Wall Street's assertions that implicit subsidies had declined or disappeared, industry sources cheered the report.

"The GAO appears to confirm what we and others who have carefully considered this issue already knew, suggesting that [too big to fail] perceptions have substantially diminished," said Paul Saltzman, president of the Clearing House, a US bank trade group representing JPMorgan Chase, Citigroup and other institutions.

A recent study commissioned by the Clearing House showed that funding advantages for the largest banks had disappeared by 2013. But other studies have come up with different conclusions. The Federal Reserve Bank of New York said the largest US banks enjoyed an extra $60m-$80m of cost savings per average new bond sale over their smaller rivals through 2009.

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