How much do "Too Big to Fail" Banks cost us? Try $34 billion a year

the total taxpayer subsidy for the 18 large bank holding companies was $34.1 billion a year.

This is a quote from Dean Baker's study, The Value of the “Too Big to Fail” Big Bank Subsidy

Baker calculates the cost to the U.S. taxpayer for borrowing interest, the interest rate for 18 TBTF (too big to fail) banks vs. smaller ones. It's much lower, due to the new policy that these favored banks will never be allowed fail, regardless of their balance sheets.

The government guarantee TBTF becomes extended to investors and lenders to these banks, resulting in overall lower costs of doing business than our network of regional and smaller banks. Nice huh? That's competition and free markets, uh huh.

The full paragraph:

The spread between the average cost of funds for smaller banks and the cost of funds for institutions with assets in excess of $100 billion averaged 0.29 percentage points in the period from the first quarter of 2000 through the fourth quarter of 2007, the last quarter before the collapse of Bear Stearns. In the period from the fourth quarter of 2008 through the second quarter of 2009, after the government bailouts had largely established TBTF as official policy, the gap had widened to an average of 0.78 percentage points.

If this gap is attributable to the TBTF policy, it implies a substantial taxpayer subsidy for the TBTF banks. In effect, because of the government safety net being extended to investors who lend money to these banks, the TBTF banks are able to borrow at a much lower cost than banks who must borrow based on their own credit worthiness. The increase in the gap of 0.49 percentage points implies a government subsidy of $34.1 billion a year to the 18 bank holding companies with more than $100 billion in assets in the first quarter of 2009.

The paper is short, attached to this post. You can read it here.

Subject Meta: 

Forum Categories: 

PDF icon too-big-to-fail-2009-09.pdf120.73 KB