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 The series of research papers, published on Tuesday by the U.S.
central bank's influential New York branch, suggests the biggest
banks benefited even after the financial crisis from lower funding
and operating costs compared with smaller ones. The researchers used
data through 2009, which did not reflect post-crisis reforms.
Fed economists also found that the biggest banks can take bigger
risks than their smaller peers.
While the study did not pinpoint the reason big banks can borrow
more cheaply, Wall Street critics say it is because investors
believe the U.S. government would again rescue them in a panic.
The new research shows "it is improper to ask the taxpayer to
underwrite the non-commercial banking operations of a complex bank
holding company," Dallas Fed President Richard Fisher, a long-time
critic of big banks, said in an interview.
Fed economists estimated the funding advantage for the five largest
banks over smaller peers to be about 0.31 percent, which they said
was statistically significant. The Fed said the papers represented
the conclusions of their individual authors, not the central bank
itself.
The study did not look at whether the advantage persists as
regulators implement the 2010 Dodd-Frank Wall Street law. Banks and
their critics have been at loggerheads for years over whether the
law did enough to prevent regulators from bailing out banks in a
future crisis.
Rob Nichols, chief executive of the Financial Services Forum, which
represents big banks, said the Fed researchers noted that the
advantage could exist because big banks offer more products and can
better diversify risk.
"They actually do say that the apparent cost of funding advantage
could be attributable to the diversity and stability of large
financial institutions," Nichols said.
The Clearing House, an industry group for the biggest banks,
published a study last week that was conducted by consulting firm
Oliver Wyman. It found the difference in funding costs between large
and small firms was negligible.
But skeptics in Congress still warn that the nation's biggest banks
like Bank of America Corp <BAC.N> and JPMorgan Chase & Co <JPM.N>
are still viewed as too integral to the U.S. economy to fail.
U.S. Senator Sherrod Brown, an Ohio Democrat, called The Clearing
House study an attempt by banks to "protect the status-quo that
requires hardworking taxpayers to pay for their risky activities."
SOLUTIONS
The New York branch conducts the Fed's trading in financial markets
and is its frontline in supervising Wall Street.
[to top of second column] |
Its staff warned against taking its findings to mean regulators
should break up the biggest banks. That could disrupt economies of
scale that keep the cost of banking services low for most Americans,
they said.
They noted that limiting bank holding companies' assets to no more
than 4 percent of U.S. gross domestic product, as some have
suggested, would increase industry-wide non-interest expenses by $2
billion to $4 billion each quarter.
Fed economists said regulators should focus on banks' liabilities
rather than trying to revamp their structure.
They suggested requiring banks to issue minimum amounts of long-term
debt, also referred to as 'bail-in' debt. Under new U.S. rules, if a
bank failed, its shareholders would be wiped out and holders of
long-term debt of the holding company, or parent, would become the
new shareholders.
The Federal Deposit Insurance Corp has said a bail-in stipulation
would fit well with its plans for resolving failed banks. The Fed is
considering writing the requirement.
"Parent-level bail-in is quick and simple, compared to the
alternatives," Joseph Sommer, an assistant vice president at the New
York Fed, wrote in a paper titled "Why Bail-In? And How!"
"At worst, bail-in creates orderly liquidation."
Regulators could link the new requirement to banks' use of risky
liabilities such as uninsured deposits, repurchase agreements, or
repos, or commercial paper, four New York Fed researchers argued in
a separate paper.
Relying on those liabilities, which are subject to runs in crises,
makes bank failures costly and threatens the stability of financial
markets, wrote James McAndrews, head of research at the New York
Fed, and three others.
If regulators forced banks to offset those liabilities with
long-term debt, the firms would have less incentive to use risky
funding sources, they said.
(Reporting by Jonathan Spicer and Emily Stephenson;
editing by Karey
Van Hall, Paul Simao and Chizu Nomiyama)
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