“The world’s largest banks still receive implicit public subsidies worth as much as $590bn because of their status as “too big to fail” and the assumption of a government bailout if they get into trouble, the International Monetary Fund warned on Monday.
“The warning, to be included in the fund’s twice-yearly Global Financial Stability Report, highlights the failure of post-financial crisis reforms to solve the problem of too-big-to-fail despite a vigorous lobbying campaign by the largest banks claiming it is no longer an issue.
“The IMF report showed that in the event of another financial crisis and in the absence of new reforms, taxpayers could still be liable for hundreds of billions of dollars of support for banks.
“The implicit subsidies take the form of the benefits that accrue to banks and their investors because of the bailout assumption. If bankers know the government is likely to bail them out, they may take more risk. In addition, investors are willing to lend to such banks at lower cost because they see the likelihood of a bailout as a form of insurance. This creates an effective subsidy for the biggest banks that distorts competition and makes the financial system overall more risky.”
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