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May 30, 2013

Too-Big-to-Fail Myths, Goldman Sachs Edition

The largest U.S. banks keep rolling out new arguments to counter the growing impression — among lawmakers especially — that they present an unacceptable threat to the economy.
The latest iteration comes from six analysts at the Goldman Sachs Global Markets Institute in the form of a paper entitled “Measuring the TBTF effect on bond pricing.” For the uninitiated, TBTF stands for too-big-to-fail, the idea that some banks are so systemically important that the government has no choice but to rescue them and their creditors if they get into trouble.
Various studies have shown — and officials including Federal Reserve Chairman Ben S. Bernanke have agreed — that too-big-to-fail status allows banks to borrow money at artificially low interest rates. Bloomberg View and others have argued that this taxpayer-backed subsidy, worth tens of billions of dollars a year, could be setting the stage for a financial disaster by encouraging banks to become as large and as systemically threatening as possible.
The Goldman paper seeks to challenge the too-big-to-fail logic by demonstrating that big banks don’t enjoy a funding advantage compared to small banks. It also asserts that even if such an advantage exists, there are explanations other than a taxpayer subsidy.”
Read full Bloomberg article here
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