Today, the Government Accountability Office (GAO) released the results of a comprehensive study confirming that Wall Street megabanks have not only received more support from government bailout programs, but enjoy a taxpayer-funded advantage -- over community and regional banks -- that widens during times of economic crisis.
U.S. Sens. Sherrod Brown (D-OH) and David Vitter (R-LA), who requested the report and are authors of the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), released the following statement:
"Today's report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions. 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.
"We can fix Too Big to Fail by passing our bipartisan legislation which would ensure that Wall Street megabanks -- instead of taxpayers -- have adequate capital to cover their losses in a crisis."
GAO's study examined size-based funding costs by comparing fixed-rate senior unsecured bonds issued by banks holding companies (BHCs) from 2006 through 2013. GAO used 16 studies that met certain criteria for relevance and rigorousness.
Rather than provide definitive numbers of a basis point (bp) funding advantage and an associated dollar figure, GAO provided the full range of findings based upon the different variables the report utilized.
GAO found that while funding cost differences may have declined or reversed in recent years, this change may be due to improvements in bank holding companies' financial conditions and low borrowing costs. Implied in GAO's analysis is that investors view all institutions as being relatively safe because of the nature of the current financial sector. The report suggests that under more normalized credit conditions, or if there was another crisis tomorrow, investors would flock to the institutions that they believe are Too Big to Fail. Further, the report confirms that the advantages Wall Street megabanks enjoy today would be roughly the same as they enjoyed back in 2008, suggesting that little progress has been made in addressing Too Big to Fail.
To supplement its empirical work, GAO also sought anecdotal evidence from market participants, including investment firms, pension funds, and insurance companies that invest in banks, and non-financial corporate bank clients. The GAO met with six corporate treasurers, all arranged through the U.S. Chamber of Commerce. These conversations found that some large corporations look at potential government support as one of the criteria used in determining which institutions with which they transact, but some do not. At least two corporate treasurers do believe that large banks will be bailed out in the future -- a factor that surely influences their financial decisions. Finally, another corporation noted that support can indirectly influence its decision making through the credit rating "uplift."
The nation's largest Wall Street banks enjoy an implicit guarantee--funded by taxpayers and awarded by virtue of their size--as the market knows that these institutions have been deemed Too Big to Fail. This allows the nation's largest megabanks to borrow at a lower rate than regional banks, community banks, and credit unions. This funding advantage, which has been confirmed by three independent studies in the last year, is estimated to be as high as $83 billion per year according to Bloomberg.
Brown-Vitter, or the Terminating Bailouts for Taxpayer Fairness Act (TBTF Act), would ensure that financial institutions have adequate capital to protect against losses.
Specifically, the TBTF Act would:
* Set reasonable capital standards that would vary depending on the size and complexity of the institution;
* Limit the government safety net to traditional banking operations; and
* Provide regulatory relief for community banks. Provide regulatory relief for