Wall St ‘Too Big To Fail’ Subsidy: You Pay, They Play

In the midst of your morning routine, you can probably lay out a number of situations in which you reach into your pocket to pay people or vendors for services/products provided. I would imagine that many reading this blog pay for a daily coffee and newspaper, perhaps a periodic shoe shine, a highway toll, or train and bus fare.

In addition to these fees, how do you feel about reaching into your pocket on a daily basis to pay a surcharge to support banking institutions on Wall Street that are deemed ‘too big to fail?’ How does that feel? Not very good, does it? I did not think so.

Yet, make no mistake, that daily banking toll you pay, and the subsidy the banks receive, are very much a reality in America circa 2014.

A few years back, Bloomberg News had identified this banking subsidy as being worth $80+ billion dollars annually (that is 3 cents on every tax dollar collected!!) to Wall Street’s ‘too big to fail’ banks. Now, none other than the Federal Reserve Bank of New York provides further substance to this subsidy accruing to the largest banks in our land in a recently released report entitled, Special Issue: Large and Complex Banks; Evidence from The Bond Market on Banks’ “Too Big to Fail Subsidy.”  The author Joao Santos writes:

In my investigation, I focus on the primary bond market, but I take a different approach to the existing studies that have looked for evidence of a too-big-to-fail subsidy in bond spreads. I test whether investors perceive the largest banks to be too big to fail by investigating whether these banks benefit from a larger cost advantage (relative to their smaller peers) when compared to the similar cost advantage that the largest firms in other sectors of activity may also enjoy when they raise funding in the bond market.

I find that the top five banks by assets pay on average 41 basis points below the smaller banks’ bond spreads, after controlling for bond characteristics, including the credit rating, maturity and amount of issue, and the overall conditions in the economy at the time of issue.