2013 February 25 Monday
Too Big To Fail: Subsidizes Big Banks $83 Billion Per Year

The US government effectively guarantees the big money center banks can not fail. This is done partly so that companies can transfer enormous sums thru these banks without fear they'll lose their cash when the banks fail. It is also done to prevent a huge domino effect where JPMorgan, Bank of America Corp., Citigroup etc would all fail in a massive panic if one of them went down. This US government promise lowers the cost of money of big banks as compared to what small banks pay. The Bloomberg editors oppose this subsidy. Click thru and read the whole thing.

Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers -- Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz -- put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.

This subsidy makes smaller banks less competitive even though many of the smaller banks are more efficient and do a better job of assessing loan risks.We get more bad loans and a less efficient economy.

Parasitism takes so many forms.

Share |      By Randall Parker at 2013 February 25 08:55 PM 


Comments
WJ said at February 26, 2013 3:31 PM:

The subsidy is a feature, not a bug. The government finds it easier to coerce a few big banks than thousands of small ones. In addition, the gov't has deliberately used its regulatory power to ban mergers between banks that aren't living up to the minority-lending policies it wants them to follow. No CRA? No merger.

Besides, when was the last time the president of the Community Bank of Mayberry was appointed Fed chairman or Treasury secretary?


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