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POLITICS: PennAve

Here's what the much-anticipated GAO report on whether banks are 'too big to fail' found

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Politics,Finance and Banking,PennAve,Joseph Lawler,Economy,GAO,Sherrod Brown,Regulation,David Vitter

The Government Accountability Office handed a modest victory to big banks Thursday in the ongoing fight over whether the "too-big-to-fail" problem has been resolved, while still giving bank credits something to cheer.

In a much-anticipated report, the GAO found that the borrowing advantages accruing to big banks because of lenders’ perception that the government gives them bailouts “may have declined or reversed” in recent years.

The GAO, the government's independent watchdog agency, ran 42 models comparing the interest rates on bonds paid by large and small banks. More than half the models showed that large banks actually had higher borrowing costs than smaller ones from 2011 to 2013, according to prepared congressional testimony from GAO official Lawrance Evans.

The models attempted to control for differences between the companies other than implicit government backing that might explain the differences in borrowing costs, to isolate the effects of any government backstops.

Whether or not banks appear to received too-big-to-fail subsidies depended on which controls were included in the models, Evans testified. Twelve models suggest that banks still do enjoy such subsidies, casting some uncertainty on the GAO’s results.

Furthermore, the GAO suggested that the subsidies accruing to big banks may have declined not because the banks have been cut off from bailouts, but because the overall credit environment is safer. If the market were as risky in 2013 as it was during the financial crisis in 2008, according to the GAO, big banks might again enjoy lower borrowing costs and an implicit subsidy.

Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., who requested the GAO study last year, seized on that last finding, saying in a joint statement that “today’s report confirms that in times of crisis, the largest megabanks receive an advantage over Main Street financial institutions.” Brown and Vitter have proposed dramatically raised capital requirements for big banks to prevent further bailouts.

Nevertheless, the GAO’s conclusions were welcomed by financial industry associations that have maintained that large banks do not enjoy an advantage from potential bailouts.

“The GAO’s findings show the impact of the numerous legislative, regulatory and industry-led reforms that have made the U.S. financial system much less complex, stronger and more resilient,” Financial Services Forum President Rob Nichols said in a response to Evans' testimony.

Thursday's report is the most authoritative finding on the state of too-big-to-fail following the implementation of the 2010 Dodd-Frank financial reform law, which overhauled the financial regulatory system with the purpose of avoiding banks again receiving taxpayer dollars through bailouts.

In January, the GAO reported that the government’s efforts to save the financial system yielded significant subsidies for big banks. That analysis, however, didn't examine the period following Dodd-Frank's enactment.

Although the GAO’s analysis was the most highly anticipated by members of Congress and the banking industry, other government agencies and companies also have weighed in on the question of whether the perception that banks are too-big-to-fail lets them borrow more cheaply.

In particular, the International Monetary Fund claimed in March that U.S. big banks receive between $15 billion and $70 billion in subsidies from the perception that they will be bailed out in an emergency.

U.S. regulatory officials have at times been cagey about whether they are now able to prevent further bailouts.

Treasury Secretary Jack Lew has said that the Dodd-Frank provisions have ended too-big-to-fail "as a matter of law," but stopped short of saying that regulators would avoid bailing out companies during a crisis.

In May it was reported that former Treasury Secretary Timothy Geithner, who oversaw the passage of Dodd-Frank, said that "of course" too-big-to-fail still exists. Geithner added that the goal of ending bailouts is “like Moby-Dick for economists or regulators. It's not just quixotic, it's misguided.”

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