IMF Says European Banks Had Up to $300 Billion Subsidy

Large banks in the euro area benefited from as much as $300 billion in implicit public subsidies four years after the global financial crisis because of investors’ expectations that governments would not let them fail, according to the International Monetary Fund.

The subsidies were reflected in lower funding costs in 2012 for banks including BNP Paribas SA and UniCredit SpA, according to an IMF report published today. In the U.S., the advantage for lenders such as JPMorgan Chase & Co. and Citigroup Inc. was as much as $70 billion, the Washington-based IMF estimated.

“Government protection for too-important-to-fail banks creates a variety of problems: an uneven playing field, excessive risk-taking, and large costs for the public sector,” the IMF said in its Global Financial Stability Report. “The expected probability that systemically important banks will be bailed out remains high in all regions.”

The IMF used its findings to call for a bigger push to eliminate the privilege, just as global regulators seek to finish by November a package of measures to prevent lenders from getting too big to fail. In the U.S., some lawmakers are trying to remove the implicit federal subsidy by either breaking up the biggest banks or increasing capital requirements.

“Countries emerged from the financial crisis with an even bigger problem: Many banks were even larger than before and so were the implicit government guarantees,” IMF economists wrote.

Japan, U.K.

The subsidies were as high as $110 billion in both the U.K. and Japan, according to the IMF. The figures were calculated for the banks that the Financial Stability Board, the Basel, Switzerland-based body that’s responsible for strengthening global financial rules, deemed “global systemically important financial institutions.”

Large banks have said their advantage has been overstated in studies.

The report was released days after research by a Federal Reserve Bank of New York economist showed that the five largest U.S. banks paid on average 0.31 percentage point less on A rated debt than their smaller peers.

While the Fed district bank’s paper was based on data from 1985 until 2009, IMF economists looked into later years, gauging the impact of financial regulation crafted in the wake of the global turmoil.

“In all advanced economies outside of Europe, subsidies have dropped from their crisis peaks but remain higher than before the crisis,” according to the IMF report. “Additional efforts are therefore necessary.”

The higher European level reflects in part the sovereign debt crisis of 2011-2012, according to the fund economists, who said the subsidies had fallen by late 2013.

“Measures to limit the size and scope of the activities of banks can in certain circumstances be helpful,” Gaston Gelos, who heads the Global Financial Stability Analysis division at the Monetary and Capital Markets department, said at a press conference today. “It’s not a panacea and we have to approach it with a lot of caution.”

The report also has separate estimates of the funding-cost advantage for a larger sample of banks. It finds that in 2013, the subsidies were at least 15 basis points in the U.S., as much as 60 basis points in the U.K. and Japan, and as much as 90 basis points in the euro area.

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