IMF Survey : Big Banks Benefit From Government Subsidies

IMF News, March 31, 2014

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Reforms since the global financial crisis have reduced, but not eliminated, the implicit government subsidy afforded to banks considered “too important to fail” because their failure would threaten the stability of the financial system.
In 2012, the implicit subsidy given to global systemically important banks represented up to $70 billion in the United States, and up to $300 billion in the euro area, depending on the estimates.
The expectation of government support allows banks to borrow at cheaper rates than they would if that support were not expected; those lower funding costs represent an implicit public subsidy to large banks.
Particularly large subsidies persist in the euro area, and to a smaller extent in Japan and the United Kingdom.
The issue of too-important-to-fail intensified after the failure of Lehman Brothers in September 2008, which forced massive government interventions and left little uncertainty about willingness to support big banks.
Banks continued to grow bigger and there are fewer banks in operation; estimated implicit subsidies to big banks rose significantly in 2009 in all countries.
Recent financial reforms and banks’ balance sheet repair contributed to a decrease in subsidy values in the recent period, though results are unequal across countries.

Implicit subsidies distort competition among banks and can favor excessive risk-taking.
The expectation of government support reduces creditors’ incentives to monitor big banks, encouraging excessive leverage and risk-taking.
Government rescues, while sometimes necessary to safeguard financial stability, entail large costs for governments and taxpayers.
Structural measures to restrict bank size and scope can entail efficiency costs by reducing economies of scale and scope, or by increasing bank profits without benefit to the economy as a whole.
Some risks are difficult to measure (for example, risks of rare but fatal financial events), suggesting a role for multiple policy tools.

Policymakers should aim to remove the implicit funding advantage to protect taxpayers, ensure a level playing field, and promote financial stability.
Further efforts should aim to reduce the probability of distress in big banks; examples include:
- Enhance capital requirements.
- Possibly recoup taxpayers’ costs from those banks through a financial stability tax, which could be based on banks’ liabilities (as in several European countries).
Continue and complete planned reforms: require banks to hold more capital, strengthen supervision of global systemically important banks, and improve domestic and cross-border resolution frameworks for large and complex financial institutions.
Consider structural measures selectively to manage hard-to-measure risks, while weighing potential efficiency costs.
Pursue sustained international coordination to avoid regulatory arbitrage and manage negative spillovers across countries; facilitate supervision and resolution of cross-border financial institutions.

The IMF’s analysis was prepared for the Global Financial Stability Report.
The IMF planned to release more analysis from its Global Financial Stability Report on April 9.

Source: IMF Survey : Big Banks Benefit From Government Subsidies — IMF News (March 31, 2014)