“Too Big to Fail’ Is Precise Enough
April 8, 2014 Leave a comment
‘Too Big to Fail’ Is Precise Enough
DAVID REILLY
March 25, 2014 5:10 p.m. ET
Warren Buffett sometimes uses a story to highlight the folly of trying to be overly precise. Speaking of a person who weighs between 300 pounds and 325 pounds, the legendary investor says the exact weight isn’t what matters; the point is simply that the person is fat.
The same may hold true for too-big-to-fail banks and the supposed privileges their scale confers, especially in terms of funding costs. The latest back-and-forth came Tuesday with the release by the Federal Reserve Bank of New York of a series of papers looking at large and complex banks.
Among these was research showing the biggest banks enjoy a funding advantage, in one case of 0.31 percentage points, compared with smaller banks. This was also the case in comparison to nonbank financial firms or nonfinancial companies. That suggests “investors believe the largest banks are likelier to be classified as too big to fail, and thus to be rescued if they run into financial trouble,” wrote João Santos, a New York Fed researcher.
Big-bank supporters retorted that since the research only covered a period up to 2009, it didn’t reflect firms’ improved financial strength and regulatory changes. They also pointed to other studies that showed smaller or no subsidies.
Yet arguing over percentage-point levels of funding subsidy misses the point. Given their size, complexity and interconnectedness to other firms, the economy and the global payment system, the government still can’t afford to let firms such as J.P. Morgan Chase,JPM -0.23% Citigroup C +0.50% or Bank of America BAC -0.92% go under.
Efforts to allow regulators to wind one of them up in an orderly fashion may help curtail some of the risk. There is no way to prove, though, that this will be sufficient to protect taxpayers.
Absent that, and given the banks have in many cases grown bigger since the financial crisis, arguing over what constitutes too-big-to-fail only serves as a way to stave off further necessary changes to the banking system.
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