Risk & Compliance

Senate to Revisit ‘Too Big to Fail’

A Senate committee will review a GAO study expected to show that large U.S. banks are still perceived as having implicit government backing.
Iris DorbianJuly 28, 2014
Senate to Revisit ‘Too Big to Fail’

It became a catch-all phrase synonymous with the financial crisis following the federal government’s unpopular bailout of top banks. This week, “too big to fail” will be revisited when a U.S. Senate panel meets to review a government study that looks at whether banks considered TBTF can take out loans at lower interest rates than smaller banks, Reuters reports.

too big to fail bankThe report, says the newswire, was authored by the Government Accountability Office and commissioned more than a year ago by Ohio Senator Sherrod Brown and Louisiana Senator David Vitter, both of whom serve on the Senate Banking Committee. Its findings are scheduled to be made public before a hearing at the Subcommittee on Financial Institutions and Consumer Protection on Thursday, July 31.

According to sources familiar with the report, the study is “expected to find a reduced subsidy for size,” according to Reuters. The study will also show that investors feel safer with the biggest banks should an economic crisis happen because of past federal bailouts for large financial service firms, such as insurance giant American International Group. This feeling of safety could be a significant reason why borrowing subsidies still exist, even though critics say they offer an unfair advantage to the bigger institutions.

This past March, the International Monetary Fund said U.S. borrowing subsidies for big banks had dropped the previous year. But the IMF cautioned, “they might never disappear completely” considering that “too-big-to-fail” banks might still receive subsidies “around 60 basis points” larger than those received by their smaller rivals.

Source:  Senate panel to consider ‘too big to fail’ report

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