Is Measuring the TBTF Subsidy a Distraction?

From American Banker
May 2, 2014


Are the nation’s biggest banks still receiving government subsidies six years after the crisis? Two recent studies by the Federal Reserve and the International Monetary Fund suggest that globally systemically important banks benefit from implicit subsidies because the market believes they will be bailed out in the event of a crisis. A separate study by Oliver Wyman, sponsored by The Clearing House Association, concluded that subsidies received by big banks are negligible. A long-awaited study on the matter from the Government Accountability Office is due out this summer.

But some argue that quantifying the subsidies that banks receive is hardly the most important issue. Global systemically important banks, or G-SIBs, continue to have very large challenges in the areas of credit, market, operational and liquidity risks. That’s what regulators, policymakers and the media should be focusing on.

I have long felt that it is very difficult to measure subsidies precisely, especially since the types and amounts of data inputs used in these measurement models-including yields, credit spreads and ratings-will influence the results in varied ways. Patrick Sims, director at Hamilton Place Strategies, a policy and public affairs consulting firm, argues that “it is important to measure the subsidy with data since the Dodd-Frank Act was passed.”

There is “no question there was a subsidy before crisis,” Sims says. But with Dodd-Frank, he says, it is “against the law to bailout a bank. No politician would bailout a bank now.”

Paul Saltzman, who oversees the legal, compliance and litigation functions at The Clearing House, has criticized the Fed study’s methodology, arguing that it “was irrelevant since the data used were bond yields before the crisis.”

Wayne Abernathy, the American Bankers Association’s executive vice president of financial institutions policy and regulatory affairs, points out that “everyone will critique each other’s methodology to measure any too-big-to-fail subsidy.”

While it may be difficult to quantify the size of subsidies, Abernathy argues that “there is a consistent trend in all the studies. Whatever advantage existed, the more recent data show a much smaller advantage, if any at all.”

Yet subsidies of any size have the potential to do real harm, as Boston University law professor Cornelius Hurley argues. “A subsidy prevents normal governance from taking place,” Hurley says. “It serves as a poison pill and as disincentive to divestitures by making all too-big-to-fail assets worth less outside the TBTF womb.”…


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