As policymakers press the case that
In the fourth quarter, interest expenses at an annual rate were equal to 3.25% of assets at banks with less than $10 billion of assets, or 56 basis points higher than at banks with more than $100 billion of assets (see charts, at right or below). The disadvantage for banks with between $10 billion and $100 billion of assets was smaller, but not by much at 42 basis points.
Cheaper funding at banking giants is widely thought to reflect the belief that they will be bailed out when they get into trouble, sparing creditors from losses. Besides setting the conditions for repeated crises, Federal Reserve Bank of Kansas City President Thomas Hoenig argued
Large banks' funding advantage has steadily declined since high points in late 2008 and early 2009, during the thick of the financial crisis when government support was needed the most.
But just as factors other than implicit safety nets — such as cheap foreign deposits, which represent small proportions of liabilities at banks with less than $100 billion of assets — may have inflated the gap, some of the narrowing could be explained by the time it takes for certificates of deposit to mature and be replaced by accounts with lower market rates.
Time deposits accounted for 30.9% of domestic deposits at banks with more than $100 billion of assets at the end of 2008, compared with 35.2% at banks with $10 billion to $100 billion of assets, and 50% at banks with less than $10 billion of assets. (The large group slashed the figure to 15% at the end of last year, compared with 25.1% at the midsize group and 42.2% at the small group.)
Meanwhile, large banks' edge over midsize banks in federal funds and repurchase borrowing has been increasing in recent periods, and there has been little movement lately in the gap to rates small and midsize banks pay for other forms of debt.
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