Too-Big-to-Fail Subsidy Claim Flaws Faulted by Bank Groups

Lobby groups for the largest U.S. banks pushed back against claims that they remain too big to fail, rebutting assertions by lawmakers and regulators that they enjoy a “taxpayer subsidy” because of their size.

The Dodd-Frank Act, passed by Congress in response to the 2008 credit crisis, greatly diminished whatever advantage the biggest lenders held over smaller rivals, five industry groups wrote today in a brief on the issue. Senator Elizabeth Warren, a Massachusetts Democrat, used outdated information when she raised the matter at a hearing last month, the groups said.

“There is substantial evidence that the market recognizes the impact Dodd-Frank has had on investor expectations,” the Clearing House, Financial Services Forum, Financial Services Roundtable, Securities Industry and Financial Markets Association and American Bankers Association said in their brief. “Given the sizable costs associated with new regulations, together with the new orderly liquidation framework, any purported TBTF-related funding advantage has clearly been reduced or even eliminated.”

The financial-industry groups, representing lenders such as JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., are responding to complaints by lawmakers and regulators including Warren and Dallas Federal Reserve President Richard Fisher that Dodd-Frank didn’t do enough to rein in big lenders.

Capping Size

Senator Sherrod Brown, an Ohio Democrat, is planning to reintroduce legislation that would cap bank size. Brown and Senator David Vitter, a Louisiana Republican, are also preparing a bill that would increase capital requirements above the international Basel III standards.

In response to the banking trade brief, Brown said it’s “no great surprise that the megabanks’ trade associations” don’t believe the subsidy exists. “Experts who are not paid by the mega banks” have concluded a subsidy remains, Brown said in a release today.

“Despite the claims made by the paid cheerleaders of the megabanks, Too Big To Fail is alive and well, and the banks receive taxpayer subsidies,” Vitter said.

Warren questioned Fed Chairman Ben S. Bernanke over what she said was a taxpayer subsidy worth $83 billion, citing an International Monetary Fund working paper on the funding advantage big banks get because of the market perception that they are protected by the government against failure. In their brief, the industry groups said the paper cited by Warren used data on banks’ borrowing costs before Dodd-Frank was passed.

“Flawed arguments regarding subsidies to large banking companies are at best out of date, and their use to call for draconian structural limits on the financial industry is out of step with the diverse financial needs of the 21st century U.S. economy,” the groups said.

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