WASHINGTON (8/4/14)--While the Dodd-Frank Act prohibits rescues of individual failing financial institution, there is a debate among market observers about whether some of the largest banks are still benefitting from belief in the notion of "too big to fail." This is according to a report from the Government Accountability Office (GAO) that examined whether these large banks are benefitting from the belief that the government will intervene to prevent failure.
The GAO reviewed the economic benefits that banks with more than $500 billion in consolidated assets may have received as a result of actual or perceived support from the government.
The report notes that, in response to recent regulatory reforms, two of three major rating agencies reduced or removed assumed government support from overall credit ratings of some large bank holding companies.
Analysis by the GAO suggests that large bank holding companies had lower funding costs than smaller ones during the financial crisis, but that there is mixed evidence of these advantages in recent years.
The GAO created its own series of 42 statistical models that take into account bond funding costs and credit risk levels to paint a picture of bond funding cost differences between bank holding companies with between $1 trillion and $10 billion.
"All 42 models found that larger bank holding companies had lower bond funding costs than smaller ones in 2008 and 2009, while more than half of the models found that larger bank holding companies had higher bond funding costs than smaller ones in 2011 through 2013," the report reads. "However, the models' comparisons of bond funding costs for bank holding companies of different sizes varied depending on the level of credit risk."
The report warns that the GAO estimates of differences in funding costs reflect a combination of factors, including investors' beliefs about the likelihood a bank will fail and if it will be rescued by the government. Because of this, the report cannot precisely identify the influence of each specific factor.
Use the resource link below to access the report.