Declining Benefits
Policy makers in the U.S. and around the world have been devising strategies to eliminate or offset the too-big-to-fail funding advantages that some studies have found the biggest banks enjoy. Credit-rating companies also assign higher ratings to the bonds of the biggest banks, upgrades that are based on an expectation that they would be rescued by the government in the event of a crisis.
“Over time you’ll see increasing market expectations that these institutions can fail,” Federal Reserve Chairman Ben S. Bernanke told the Senate Banking Committee in February. “The benefits of being large are going to decline over time, which means some banks are going to voluntarily begin to reduce their size.”
Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a Bloomberg View columnist, said that Goldman Sachs’s report proves the value of the too-big-to- fail subsidy because it shows the biggest banks enjoyed a large advantage during the financial crisis.
Skewed Findings
“When is it valuable for me to be too big to fail?” Johnson said. “When it’s really valuable is when there’s stress in the system.”
Comparing funding costs of big, international, complex banks and smaller lenders fails to account for differences in their business models and leverage, he said.
“The question is whether the big financial conglomerates borrow more cheaply than they would otherwise,” Johnson said. “Because if you’re comparing them with small banks, there’s a lot of other things going on there.”
The Goldman Sachs report said that prior studies estimating the funding advantage enjoyed by the largest lenders have been skewed because they included non-bank financial institutions, which enjoy a higher funding advantage, and also included firms outside the U.S.
The Goldman Sachs report was prepared by the firm’s public policy research unit, called the Global Markets Institute. A disclosure on the report said that it may have been discussed with or reviewed by people outside the research division, both within and outside Goldman Sachs, while it was being prepared.