More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.
The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today’s market.
Hunstman provides no citation for the 50 basis point subsidy, however. I know that there were studies done before Dodd-Frank was enacted that estimated the subsidy in that range (here’s a summary of that debate). Does anyone know of studies that have been done since Dodd-Frank? Dodd-Frank supposedly eliminated the implicit subsidy of too big to fail and one of the open questions is whether in fact it actually did so. So one cannot simply extrapolate from pre-Dodd-Frank estimates to post, unless one simply assumes that Dodd-Frank did not eliminate it. Does anyone know of any work that has been done post-Dodd-Frank as to whether the subsidy has been eliminated? The language of the law makes quite clear that the resolution process is supposed to eliminate it but most of those who I’ve talked to believe that in the end the TBTF institutions will be bailed out. But that’s an assertion that hasn’t been proven and I’ve not been able to find any studies that have examined the question post-Dodd-Frank.
Update: Thanks for those who pointed out the typo in Huntsman’s name. Boy, that’s embarrassing.