sequence

Implicit subsidies to banks will continue

Tools

I recently noted the idea that banks enjoy an implicit subsidy from the government that stems from the notion that they will be bailed out should they run into serious trouble.

The notion certainly held true in the 2007 financial crisis. Even now, despite a lot of political drama, all the credit rating companies continue to factor the essence of "too big to fail" into their ratings of the top banks.

Despite a lot of rhetoric that suggests "too big to fail" has been ended, most find that notion a laughable. Certainly, there is little evidence in the fixed income market for that idea. As the same debate continues to rage, Bloomberg weighs in again to note that when you factor in the implicit subsidies to big banks, they "aren't really profitable at all" and that the billions they "allegedly" earn for their shareholders is "almost entirely a gift from U.S. taxpayers."

The opinion piece notes a recent study that has pegged the subsidy at 0.8 percent of all liabilities, which means that the total subsidy to the industry amounts to $83 billion a year. That's quite a gift, and one that has sustained them recently. And this isn't going to change anytime soon.

The status quo has become entrenched, as the focus moves away from punitive action and toward partnership on the economy. There are many ways to reduce the subsidy, but all might have the effect of crimping lending even more. That's not going to be palatable right now.

For more:
- here's the article