U.S. banks enjoy 'too-big-to-fail' advantage: Fed study

Tue Mar 25, 2014 3:26pm EDT
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By Emily Stephenson and Jonathan Spicer

NEW YORK (Reuters) - A landmark study by Federal Reserve economists found that large U.S. banks enjoy a "too-big-to-fail" advantage in financial markets, joining a heated debate that could influence regulators that are implementing tough new rules for Wall Street.

The series of research papers, published on Tuesday by the U.S. central bank's influential New York branch, suggests the biggest banks benefited even after the financial crisis from lower funding and operating costs compared with smaller ones. The researchers used data through 2009, which did not reflect post-crisis reforms.

Fed economists also found that the biggest banks can take bigger risks than their smaller peers.

While the study did not pinpoint the reason big banks can borrow more cheaply, Wall Street critics say it is because investors believe the U.S. government would again rescue them in a panic.

The new research shows "it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company," Dallas Fed President Richard Fisher, a long-time critic of big banks, said in an interview.

Fed economists estimated the funding advantage for the five largest banks over smaller peers to be about 0.31 percent, which they said was statistically significant. The Fed said the papers represented the conclusions of their individual authors, not the central bank itself.

The study did not look at whether the advantage persists as regulators implement the 2010 Dodd-Frank Wall Street law. Banks and their critics have been at loggerheads for years over whether the law did enough to prevent regulators from bailing out banks in a future crisis.

Rob Nichols, chief executive of the Financial Services Forum, which represents big banks, said the Fed researchers noted that the advantage could exist because big banks offer more products and can better diversify risk.   Continued...

A man walks past JP Morgan Chase's international headquarters on Park Avenue in New York July 13, 2012. REUTERS/Andrew Burton