The findings of last week's government report on big bank subsidies were misconstrued in a recent column by Camden Fine ("A Subsidy of Any Size Is Still Too Big," Aug. 1, 2014). Mr. Fine argues that the study by the Government Accountability Office "reiterates the importance of ending the too-big-to-fail epidemic." In fact, the GAO report offers proof that meaningful progress has been made since the financial crisis.
The GAO was asked by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., to study whether the six largest banking companies enjoy a cost of funding differential over smaller institutions stemming from investors' expectation of future bailouts. If a funding differential could be linked to bailout expectations, the difference could justifiably be characterized as a kind of "subsidy."
Mr. Fine acknowledges that the GAO's report "finds that the size of big bank subsidies has diminished since the crisis." But he then asserts that large banks "can still access subsidized funding more cheaply than smaller financial firms because creditors believe the government would bail them out in the event of a crisis."
Actually, the GAO not only found that any large bank cost of funding differential had diminished since 2007 the differential may have actually reversed so that large banks are now at a disadvantage. In testimony before Sen. Brown's subcommittee last Thursday, Lawrance Evans, Jr., the GAO's director of financial markets and community investment, said: "[M]ost models suggest that such advantages may have declined or reversed. For example, most models we estimated suggest that large bank holding companies had higher bond funding costs than smaller bank holding companies in 2013."
Mr. Fine also asserts that "the value of being too-big-to-fail increased significantly during the financial crisis, and would do the same in subsequent downturns." But in the years since 2009, significant statutory, regulatory, and industry changes have been made to ensure that no institution is too big to fail and that taxpayers are never again put at risk. Moreover, there is zero appetite in Congress, among regulators, or among the American people to ever again bail out a failing bank. If depositors and investors were to flock to large banks in a future crisis, it would be because large banks offer strength, diversity and liquidity not because of expectations of bailouts. Investors seek shelter in Treasury securities during a crisis for the same reason.
With all this in mind, it is misguided to support legislative efforts that would require banks to hold dramatically higher capital or forcibly break them up. Banks are already holding capital at or near record highs. Further hiking up requirements would diminish banks' ability to lend to working families and businesses, undermining the ongoing economic recovery.
Similarly, dismantling highly diversified banks would undermine financial stability. Diversification is a hallmark of sound investing and institutional and systemic stability. Breaking up large, multi-faceted institutions would produce less diversified, more concentrated components that could be more prone to sudden shock and instability.
The GAO report demonstrates that our financial system is stronger, more resilient and more fair today than it was in 2007. That said, I am in strong agreement with Mr. Fine about the urgent need for regulatory relief for small community banks, which continue to struggle under a compliance burden that is unnecessarily heavy and complex. An economy as diverse as that of the United States needs banks of all sizes and business models, including thriving community banks and large, diversified, globally active banks. On that point, I am certain large banks and small banks can agree.
Rob Nichols is the president and chief executive of the Financial Services Forum.