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The Editors

Why You Should Care About That $83 Billion Bank Subsidy

Our estimate that taxpayers provide an $83 billion annual subsidy to the largest U.S. banks has provoked a lot of debate. Amid the arguments over methodology, the most important points may be getting lost. So here they are: The subsidy is too large, it is bad for the economy, and the best way to deal with it is through measures such as increased capital requirements.

The subsidy comes in the form of lower borrowing costs, which large banks enjoy because creditors expect the government to bail them out in an emergency. We assumed, in consultation with a co-author of an International Monetary Fund working paper on the subject, that the funding advantage amounts to 0.8 percentage point over the longer term, and that applying the number to banks’ total liabilities is the best way to get at its dollar value.