The nation's biggest banks may be too big to fail but they enjoy little advantage when it comes to the cost of capital.
The bond markets do not price in "an expectation of government support" for institutions with more than $500 billion of assets when determining where to invest, Goldman Sachs concludes in a new report.
Goldman is one of the six bank holding companies that many claim enjoy a funding advantage over smaller banks because the markets believe that the government would not let them fail. The others are JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (NYSE:C), Wells Fargo (WFC) and Morgan Stanley (MS).
Though these banks had a mean funding advantage of as much as nine basis points compared with other banks at the height of the financial crisis, they have incurred a funding disadvantage the past two years.
"This undermines the notion that government support drives a [too-big-to-fail] advantage," the report said.
The six banks now pay about 10 basis points more for capital compared with other banks that issue bonds, according to the report. The report does not say why these banks are paying more for capital, saying only that previous studies suggesting that they pay less are flawed.
The findings come as policymakers consider proposals to hike the capital cushion that banks with at least $500 billion of assets must hold. Boosting capital requirements may lessen the need for government assistance in a future crisis, proponents say.
According to Goldman, research into whether an implicit government guarantee lowers banks' costs of capital has tended to examine an overly broad set of bond issuers, including asset managers and insurance companies, rather than banks alone.
To be sure, the report notes that, historically, large banks have enjoyed a slight funding advantage over smaller ones. This could be because bonds of these firms trade more frequently and investors value that liquidity, the report said.
"Our empirical work suggests two conclusions: first, that a significant bond funding advantage for the largest banks would not have been unusual or surprising, even if [too-big-to-fail] did not affect funding costs, and second, that that actual observed advantage has been quite small over time, and has a been a disadvantage since the crisis abated."
Still, if the large banks gain a slight funding advantage it could be because investors view them as safer bets than smaller banks.
The biggest banks also are less likely to generate losses for the government than their smaller peers. Repayments of funds banks received through the Troubled Asset Relief Program with at least $500 billion in assets have yielded a 15% profit on the government's investment, while repayments by banks with between $50 billion and more than $500 billion resulted in a 12% return, the report found.
At the same time, more than 400 banks with assets less than $50 billion have yet to repay roughly half the combined $14 billion they received through Tarp, while the government has written off another $3 billion from those banks entirely, the report finds. Of the 330 small banks that have left Tarp, about 40% did so using funds from the Small Business Lending Fund and other government programs.