March 1, 2013

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.

“Reasonable people can make different assumptions and arrive at different answers. The economists Frederic Schweikhard and Zoe Tsesmelidakis estimated the subsidy was about $32 billion a year for the bond debt of U.S. banks alone, from 2007 through 2010. Andy Haldane, a senior official at the Bank of England, put the subsidy at $60 billion a year for the five largest global banks, from 2007 through 2009. A. Joseph Warburton and Deniz Anginer, respectively of Syracuse University and Virginia Tech, found that the subsidy for the largest U.S. banks went from less than $10 billion in 2004 to more than $100 billion in 2009. Ed Kane of Boston College put it at $300 billion for 2009 alone.”