Fed study: Big banks enjoy 'too big to fail' perks

A series of new studies from the Federal Reserve Bank of New York finds that big banks do receive a funding edge thanks to their “too big to fail” status.

The collection of 11 studies, released Tuesday, marks the latest contribution to a long-running debate over whether “too big to fail” has been adequately addressing by financial reforms enacted since the 2008 crisis.

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Skeptical lawmakers from both parties have insisted that the nation’s biggest banks, which have just grown larger since the collapse, still enjoy an implicit government backstop, and receive competitive advantages as a result of it.

But the White House and the financial industry have largely maintained that “too big to fail” has been largely put to rest, as new tools in the Dodd-Frank financial reform law give regulators the tools to wind down, not bail out, ailing banks, no matter their size.

The authors of the studies generally found that big banks can take on more risk and borrow more cheaply than their smaller counterparts, or even similarly-sized companies outside the financial sector. Economists estimated that the nation’s five largest banks can borrow at a rate roughly 0.31 percent lower than their smaller competitors, and half a percentage point lower than similarly sized non-banks.

Whether that advantage exists because investors believe the government would step in to rescue the financial giants if it came to it was not addressed in the new studies.

Furthermore, the studies relied on data through 2009, meaning it does not reflect any changes brought on by Dodd-Frank reforms.

Nonetheless, the studies are emboldening advocates of breaking up the nation’s biggest banks, including those in Congress.

Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have long pushed to subject the biggest banks to additional restrictions due to their size, or breaking them up into smaller pieces.

On Tuesday, Brown called the New York Fed’s work a confirmation of their message.

And Vitter said it was noteworthy that they came from the New York Fed, long seen as close to the industry.

“Even the pro-megabank New York Federal Reserve has finally acknowledged what most research has already demonstrated,” he said in a statement.

The pair have pushed the Government Accountability Office to conduct its own study on the potential existence of a “too big to fail” subsidy. The results of that study are expected to be made public later this year.