Despite the passage and ongoing implementation of the Dodd-Frank Act and other financial reforms, some policymakers and observers continue to question the economic and societal value of large banks in the United States. The debate over the appropriate size of the banking industry recently has focused on whether some institutions enjoy an unfair economic advantage due to market perceptions of U.S. government policies that, implicitly or explicitly, effectively “subsidize” large banks. Other critics argue that the existence of large banks is inconsistent with the objective of financial stability. Such arguments are invoked to support aggressive proposals to “break up” large banks—whether directly or indirectly—in the U.S.
As a key participant in this debate, The Clearing House provides empirically supported research reports, data studies and working papers that highlight the key issues and correct misperceptions. Large banks provide a unique set of services on which businesses, consumers and our economy depend and are vital to the continued spread of innovation. As large banks provide services that are global in scale and scope, they are a solution to the considerable challenge of meeting the needs of a dynamic global marketplace. Policy proposals to restructure our banking industry that ignore these realities should be resisted. The Clearing House will continue to provide fact-based analysis that is founded on a meaningful understanding of what large banks do, why they need to be large to do those things efficiently, and how these institutions are vital to the overall economic system and the global economy.
Estimating the Regulatory Costs for U.S. GSIBs
The Clearing House Association released research that finds that the largest banks have incurred $27-$45 billion in annual costs related to post-crisis regulation. The study considers the annual cost of compliance with the: (i) G-SIB capital surcharge, (ii) enhanced supplemental leverage ratio, (iii) liquidity coverage ratio, (iv) net stable funding ratio, (v) proposed rules on long-term debt and wholesale funding, and (vi) Tester amendment. The study excludes offsets that are difficult to quantify, such as those related to CCAR, and thus likely underestimates the overall cost of compliance.
Estimating the Regulatory Costs for U.S. GSIBs
Cost of Funding Differential
“Do bond spreads show evidence of a too big to fail effect?” is the second working paper in a series of independent research conducted and released by Oliver Wyman. The study finds clear evidence that by 2013 any funding cost differences among banks that existed in prior years have disappeared, and that any remaining differences could be due to factors other than TBTF perceptions. These findings strongly suggest that recent regulatory reforms have dramatically changed market perceptions of risk and funding costs today.
Oliver Wyman Study: Do bond spreads show evidence of a too big to fail effect?
An independent research report, commissioned by The Clearing House Association, and authored by a leading global management consulting firm Oliver Wyman, found that money market deposit rate advantages for the largest banks were just four basis points at the end of 2012. Further, the study found evidence that this small difference may not be attributable to TBTF perceptions – that is, potential perceptions among market participants that the government would intervene to prevent the failure of a large financial institution.
Oliver Wyman Study: Do Deposit Rates Show Evidence of Too Big to Fail Effects? An updated look at the empirical evidence through 2012 among US banks
The Value of Large Banks Series
To correct the misconception amongst those who argue that large banks reap an unfair cost-of-funding benefit due to a market perception that they will be bailed out by the government should a future crisis emerge, TCHPC has launched this educational briefing series, which collectively addresses the issue of whether large banks enjoy unfair economic benefits as a result of express, direct or implied government policies. The series provides a detailed overview of the broad range of issues that policymakers must consider when asking, and trying to accurately answer, this complex question.
The Value of Large Banks Series, Working Paper No. 1: Identifying the Right Question
The first paper of the Working Paper Series takes a deep dive into the fundamental issues that must be addressed to determine whether large banks enjoy unfair economic benefits as a result of expressed, implied, or perceived government policies.
Working Paper No. 1: Identifying the Right Questions
The Value of Large Banks Series, Working Paper No. 2: Access to Deposit Insurance and Lender-of-Last-Resort Liquidity
The second paper in the Working Paper Series examines whether large banks benefit disproportionately from federal deposit insurance and liquidity programs, or from the various types of extraordinary support provided by the U.S. government in response to the historic challenge facing the economy in the wake of the financial crisis.
Working Paper No. 2: Access to Deposit Insurance and Lender-of-Last-Resort Liquidity
The Value of Large Bank Series, Working Paper No. 3: Assessing Funding Cost and the Net Impact of Government Policy on Large Banks
The third paper in the Working Paper Series examines existing academic literature on bank funding costs, noting the significant decline in large bank funding advantages post implementation of Dodd-Frank reforms.
Working Paper No. 3: Assessing Funding Cost and the Net Impact of Government Policy on Large Banks
The Value of Large Banks Series, Working Paper No. 4: Quantifying the Impact of Macroprudential Regulation on the Largest U.S. Banks
The fourth paper in the Working Paper Series focuses on the costs of macroprudential regulation and the net impact of government policies on banks.
The Value of Large Banks Series, Working Paper No. 4: Quantifying the Impact of Macroprudential Regulation on the Largest U.S. Banks
Intelligence-Squared Debate
On October 16, 2013, TCHPC’s Paul Saltzman and Doug Elliott of the Brookings Institution successfully argued against the motion ”Break Up the Big Banks” at the Intelligence Squared Debate, an Oxford-style debate that was broadcast on NPR. Saltzman and Elliott took on Richard Fisher, President of the Dallas Federal Reserve, and Simon Johnson, Professor at MIT, and argued that breaking up large banks would eliminate key societal benefits and fail to make the financial system any safer.
Watch the debate
Vanquishing TBTF: Rhetoric v. Reality and the Value of Systemically Important Banks
Systemic risk and Too Big to Fail (“TBTF”) have been the subject of intense debate on Main Street, Wall Street, and Capitol Hill. At a March 26, 2013 event at Boston University, TCHPC Association President Paul Saltzman presented TCHPC’s analysis on the rhetoric and misperceptions surrounding the TBTF debate and highlighted the various reforms in place to eliminate this problem, including the new resolution framework under Title II, enhanced capital and liquidity standards, and improved ex ante macro-prudential tools to identify and monitor potential sources of systemic risk.
Vanquishing Too Big to Fail Presentation
Scaled to Serve
TCHPC analyzes the size, structure and concentration of the U.S. banking system in relation to the needs of consumers, businesses and the U.S. economy. The report compares the U.S. banking system to those of other developed economies and finds that the banking system in the U.S. is appropriately scaled to support the economy and business engaged in global commerce.
Scaled to Serve
Economics of Large Banks Study
TCHPC’s in-depth data study examines large banks’ economies of scale and scope and their instrumental role in the spread of innovation and finds that the 26 largest U.S. banks annually provide an estimated $50-$110 billion in unique economic value.
Economics of Large Banks Study