Salient to Investors:

Goldman Sachs study says:

  • Bond investors do not perceive the 6 biggest US banks as too big to fail, including itself. The 6 banks have had an average funding-cost advantage over smaller competitors of 0.31 percent since 1999 – widest in the financial crisis and now an average 0.10 percent.
  • The largest firms in nearly all industries benefit from lower bond-funding costs than their smaller peers, and the biggest banks actually benefit less.
  • Big banks depend more on bond-market funding than small lenders, which use deposits to fund their loans.
  • Investors are willing to pay for the benefits of liquidity, and large firms tend to have more liquid bonds.
  • Prior studies estimating the funding advantage have been skewed because they included non-bank financial institutions, which enjoy a higher funding advantage, and also included firms outside the US.

The Independent Community Bankers of America said that 14 of 15 studies found a significant too-big-to-fail subsidy, while the resulting cost savings enjoyed by the 10 largest banks has more or less equaled or exceeded their net income.

Simon Johnson at MIT said that Goldman’s report proves the value of the too-big-to-fail subsidy because it shows the biggest banks enjoyed a large advantage during the financial crisis, and comparing funding costs of big, international, complex banks and smaller lenders fails to account for differences in their business models and leverage.

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