FOR IMMEDIATE RELEASE: July 31, 2014

CONTACT: Marcus Stanley
202-466-3672 / marcus@ourfinancialsecurity.org

AFR Statement on GAO Report on Expectations of Government Support for Bank Holding Companies

Over the past two years a wide variety of respected sources, including the International Monetary Fund, the New York Federal Reserve, and numerous academics have found that large bank holding companies have enjoyed a funding advantage over smaller banks due to the continuing perception that these companies would receive significant public support to prevent their failure.

The study released today by the General Accounting Office once again finds clear evidence that these funding advantages existed over the 2006-2011 period, and would in general be expected to exist during periods of elevated credit risk. However, the GAO’s statistical exercise did not find clear evidence for the continued existence of a ‘too big to fail’ funding advantage in 2013. Some of the models they tested did find such a funding advantage, but more did not.

AFR does not believe that this finding should be read as evidence that the problem of ‘too big to fail’ has been solved.  First, one would expect any funding advantage due to government support to decline during periods where perceptions of credit risk generally in the markets was low. Credit spreads have reached unusually low levels over the past few years.  Consistent with this, the GAO analysis predicts that should credit risk perceptions increase, the funding advantage for large banks would reappear.  Second, the GAO found that market participants they interviewed believe that implementation of the Dodd-Frank Act so far has reduced, but not eliminated the likelihood that the federal government would step in to prevent any of the largest bank holding companies from failing.   Third, regulators themselves have stated that the implementation of the Dodd-Frank resolution mechanism is not yet adequate to end the possibility of government support to large banks. Finally, other potential bailout mechanisms, such as Federal Reserve emergency lending, are not yet subject to adequate controls.