How big banks cost taxpayers $83 billion per year

The problem of the big banks is becoming acute, as was made clear by Neil Barofsky in his excellent book Bailout: How Washington Abandoned Main Street While Rescuing Wall Street that I reviewed here. While having banks that are too big to jail makes a mockery of the legal system by inviting corruption, there is another reason that they are bad and that is because when some banks are perceived as too big to fail/jail, then they are being implicitly guaranteed by the US government, that it will step in and rescue them if they get in trouble. That means that people feel as safe lending money to them as they feel with buying US Treasury bonds and this carries with it real costs.

The editors of Bloomberg News spell out how in addition to the overt costs to the economy due to the banks behaving badly, the hidden costs of the US government backing the big banks are also huge.

Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail. [My italics-MS]

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.

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected. [My italics-MS]

The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders. [My italics-MS]

You can see why the big banks will fight tooth and nail to prevent any attempts to make them smaller. But the rampant corruption and abuse by banks is getting so bad that even in the normally supine US Congress there is rising sentiment to do something. A couple of senators are taking on the issue of too-big-to-fail/jail banks, with Sherrod Brown (D-Ohio) and David Vitter (R-Louisiana) sponsoring legislation to impose stricter capital requirements on big banks that have more than $500 billion in assets (which would cover the above five banks plus Morgan Stanley), so that they have less money to take risks with and are thus less likely to fail. Brown and Vitter have to do this in the face of opposition from an Obama administration that is beholden to the banks.

Meanwhile Elizabeth Warren continues her questioning of regulators as to why big banks are not being prosecuted vigorously for major illegalities. Here is another hearing where Warren exposes how government regulators, who are supposed to be protecting the interests of the taxpayers, instead protect the banks that are taking advantage of them, even in cases when they are involved in illegal activities, and wrongfully foreclosed on people’s homes. It is extraordinary but is another example of what Barofsky wrote about.

The Daily Show had a good segment on how government regulators carefully arrive at deals with banks to levy fines for their wrong doing that are large enough to impress the public but not large enough to bother the banks. And of course, top bank executives are never threatened with jail for their malfeasances, which would be a much better deterrent to future wrong doing.

(This clip was aired on May 7, 2013. To get suggestions on how to view clips of The Daily Show and The Colbert Report outside the US, please see this earlier post.)


  1. Pierce R. Butler says

    Senator David Vitter doing something positive & politically risky? Surely the end times are at hand…

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