Ben Bernanke recently shared with the Senate Banking Committee that the nation’s largest banks receive a generous subsidy, in everything but name. The Federal Reserve Board chairman explained that because the banks are viewed as “too big to fail,” the government coming to the rescue to prevent a greater calamity, they borrow money at lower interest rates.
Eric Holder, the attorney general, made a similar acknowledgement in Senate testimony. He expressed concern that some banks are so big “it does become difficult to prosecute them.”
These and other comments, from Democrats and Republicans, have brought new life to the worthy effort of Sen. Sherrod Brown. The Ohio Democrat long has been pushing legislation to reduce the size of the largest banks — toward something in the range of not too big to fail. He would limit the amount of debt a single bank could assume, reducing a $2 trillion institution to one in the neighborhood of $1.2 trillion, or still plenty big but small enough and simpler that its collapse wouldn’t threaten a sweeping meltdown.
In 2010, Brown, along with then Sen. Ted Kaufman of Delaware, attempted to attach a too-big-to-fail provision to the Dodd-Frank financial regulation bill. They fell short. What has deepened since is an awareness of the perverse incentives. The government guarantee, or virtual certainty of a bailout, spurs banks to grow and add risk, their failure inviting greater harm and a larger rescue.
The editors at Bloomberg View calculated last month the size of the subsidy received by the 10 largest banks in the country. They pointed to a study that concluded the big banks pay 0.8 percentage points less in borrowing costs. Multiply that discount by the total liabilities, and Bloomberg put the annual subsidy at roughly $83 billion.
Bloomberg noted that the five largest banks account for $64 billion of the amount, or a sum equivalent to their profits in a typical year.
The megabanks warn that limiting their size would put them at a disadvantage in the global marketplace, eroding a competitive edge for the American economy. Brown reminds that the banks still would be big enough to succeed globally and that borrowers often use a range of creditors.
The Dodd-Frank bill represents a marked improvement in financial regulation. It sets up a mechanism for unraveling a failed bank. It establishes stronger capital requirements, banks reducing their leverage, or exposure. What hasn’t changed is the perception that should the largest banks run into big trouble, the federal government would come to the rescue, skewing incentives and, ultimately, putting taxpayers on the hook.