The Too-Big-to-Fail problem is worsening, and the macroeconomic effects could be quite unpleasant. While it's no secret that the top-tier banks have had a competitive edge over the rest of the banking sector, new research shows that the U.S. government's efforts to prevent a systemic breakdown have driven an even more pronounced wedge than previously thought between the top 18 banks and everybody else. As a result, a continuing, perhaps more debilitating credit crunch for small businesses seems likely, which would slow what is already expected to be a sluggish recovery in U.S. economic growth.

Dean Baker, co-director of the Center for Economic and Policy Research, says the rescue of the financial system has entrenched a TBTF policy in the U.S. His research indicates that a "big-bank subsidy" has emerged, with TBTF banks enjoying a significant break in borrowing costs compared with smaller institutions. From the first quarter of 2000 through fourth-quarter 2007 the spread between average costs of funds for smaller banks and those with more than $100 billion in assets came to 0.29 percentage points. From fourth-quarter 2008 through the first half of this year that gap widened to 0.78 percentage points.

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