Big banks don’t have a lot of friends these days, but in a letter to the Government Accountability Office last week, Sens. Tom Carper (D-DE) and Mark Kirk (R-IL) showed that there are at least some people on Capitol Hill willing to stand up and make sure giant financial firms get a fair shake from the government.
The GAO is currently writing the second half of a two-part study analyzing the funding advantage that large banks have over smaller institutions. The “funding advantage” refers to the ability of large institutions to borrow at lower rates than their smaller competitors, which in turn allows them to lend at lower rates while retaining the same profit margin.
The first of the two studies, released last year, confirmed that during the financial crisis from 2007 to 2009, large banks benefited disproportionately from the federal bailout, and were able to borrow at rates considerably lower than those offered to smaller competitors. The second report, expected later this year, will try to assess just how much of an ongoing funding advantage big banks enjoy, and how much of it is due to the public’s impression that the government won’t let them fail. Both reports were mandated by the Dodd-Frank financial services reform bill.
In their letter, Sens. Carper and Kirk expressed concern that GAO might not be using an “apples to apples” comparison when it assesses banks with assets over $500 billion, and laid out a sizeable list of factors that they want the GAO to begin to consider in the report, which investigators have already spent many months on.
Professor Cornelius K. Hurley, director of the Boston University Center for Finance, Law & Policy, said the letter seemed to him to be written in order to “throw sand in the gears” of the study process. “The letter seeks to divert the GAO from its assigned specific task of measuring the benefit from being TBTF [too big to fail] into a much broader assessment of the efficacy of Dodd-Frank,” he said.
A spokesperson for Sen. Carper said, “The senators just want to make sure that the next stage of the GAO report has the full context by using the most current data available.”
Federal lawmakers and regulators have publicly claimed that no bank is too big to fail, and regulators have been putting in place mechanisms meant to make it possible to conduct an orderly liquidation of a failed megabank in the event of a problem.
Detractors believe that in the event of a huge bank’s failure, the government would have no choice but to prop it up. And regulations have not helped alter that perception. A handful of the biggest banks in the country have been designated “systemically important financial institutions,” which makes them subject to more stringent regulation; but, at the same time, the designation reinforces the public’s impression that the government recognizes the importance of their stability to the broader U.S. economy.
Large banks have good reason to be concerned about what the GAO will find. Recent studies released by the Federal Reserve Bank of New York and the International Monetary Fund have both found that an implicit government subsidy exists for the largest banks.
If GAO were to determine that a subsidy exists in the U.S., it would not trigger any immediate action. However, it would add weight to claims by lawmakers and others that the largest financial institutions must either be more strictly regulated or be forced to break themselves up into smaller entities.
The push against the largest banks has been led by Sens. Sherrod Brown (D-OH) and David Vitter (R-LA), who both support tougher regulation for the financial giants. The second GAO report is not expected until the summer. Whether the additional requests by Carper and Kirk will delay it is not clear at this point.
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