U.S. banks enjoy 'too-big-to-fail' advantage: Fed study

Man walks past JP Morgan Chase's international headquarters on Park Avenue in New York
A man walks past JP Morgan Chase's international headquarters on Park Avenue in New York July 13, 2012. REUTERS/Andrew Burton

By Emily Stephenson and Jonathan Spicer

NEW YORK (Reuters) - A landmark study by Federal Reserve economists found that large U.S. banks enjoy a "too-big-to-fail" advantage in financial markets, joining a heated debate that could influence regulators that are implementing tough new rules for Wall Street.

The series of research papers, published on Tuesday by the U.S. central bank's influential New York branch, suggests the biggest banks benefited even after the financial crisis from lower funding and operating costs compared with smaller ones. The researchers used data through 2009, which did not reflect post-crisis reforms.

Fed economists also found that the biggest banks can take bigger risks than their smaller peers.

While the study did not pinpoint the reason big banks can borrow more cheaply, Wall Street critics say it is because investors believe the U.S. government would again rescue them in a panic.

The new research shows "it is improper to ask the taxpayer to underwrite the non-commercial banking operations of a complex bank holding company," Dallas Fed President Richard Fisher, a long-time critic of big banks, said in an interview.

Fed economists estimated the funding advantage for the five largest banks over smaller peers to be about 0.31 percent, which they said was statistically significant. The Fed said the papers represented the conclusions of their individual authors, not the central bank itself.

The study did not look at whether the advantage persists as regulators implement the 2010 Dodd-Frank Wall Street law. Banks and their critics have been at loggerheads for years over whether the law did enough to prevent regulators from bailing out banks in a future crisis.

Rob Nichols, chief executive of the Financial Services Forum, which represents big banks, said the Fed researchers noted that the advantage could exist because big banks offer more products and can better diversify risk.

"They actually do say that the apparent cost of funding advantage could be attributable to the diversity and stability of large financial institutions," Nichols said.

The Clearing House, an industry group for the biggest banks, published a study last week that was conducted by consulting firm Oliver Wyman. It found the difference in funding costs between large and small firms was negligible.

But skeptics in Congress still warn that the nation's biggest banks like Bank of America Corp (BAC) and JPMorgan Chase & Co (JPM) are still viewed as too integral to the U.S. economy to fail.

U.S. Senator Sherrod Brown, an Ohio Democrat, called The Clearing House study an attempt by banks to "protect the status-quo that requires hardworking taxpayers to pay for their risky activities."


The New York branch conducts the Fed's trading in financial markets and is its frontline in supervising Wall Street.

Its staff warned against taking its findings to mean regulators should break up the biggest banks. That could disrupt economies of scale that keep the cost of banking services low for most Americans, they said.

They noted that limiting bank holding companies' assets to no more than 4 percent of U.S. gross domestic product, as some have suggested, would increase industry-wide non-interest expenses by $2 billion to $4 billion each quarter.

Fed economists said regulators should focus on banks' liabilities rather than trying to revamp their structure.

They suggested requiring banks to issue minimum amounts of long-term debt, also referred to as 'bail-in' debt. Under new U.S. rules, if a bank failed, its shareholders would be wiped out and holders of long-term debt of the holding company, or parent, would become the new shareholders.

The Federal Deposit Insurance Corp has said a bail-in stipulation would fit well with its plans for resolving failed banks. The Fed is considering writing the requirement.

"Parent-level bail-in is quick and simple, compared to the alternatives," Joseph Sommer, an assistant vice president at the New York Fed, wrote in a paper titled "Why Bail-In? And How!"

"At worst, bail-in creates orderly liquidation."

Regulators could link the new requirement to banks' use of risky liabilities such as uninsured deposits, repurchase agreements, or repos, or commercial paper, four New York Fed researchers argued in a separate paper.

Relying on those liabilities, which are subject to runs in crises, makes bank failures costly and threatens the stability of financial markets, wrote James McAndrews, head of research at the New York Fed, and three others.

If regulators forced banks to offset those liabilities with long-term debt, the firms would have less incentive to use risky funding sources, they said.

(Reporting by Jonathan Spicer and Emily Stephenson; Editing by Karey Van Hall, Paul Simao and Chizu Nomiyama)

  • Best Fidelity Funds for Your Retirement Savings

    Best Fidelity Funds for Your Retirement Savings

    Kiplinger Fidelity is home to some of the greatest stock fund managers of all time. At the top of the list is Peter Lynch, who during his tenure at Fidelity Magellan from 1977 to 1990 delivered a 29.1% annualized return. He beat out all other stock funds and bested Standard & Poor’s 500-stock index by an average of 13.5 percentage points per year. Since then, other stars have shone brightly, including Contrafund’s Will Danoff, Low-Priced Stock’s Joel Tillinghast and Growth Company fund’s Steve Wymer. The firm’s string of famous managers may explain why 22 of its funds land on a list of the 105 most popular mutual funds in employer-sponsored retirement savings plans. We set out to identify the

  • 8 Things You Should Never Keep in Your Wallet

    8 Things You Should Never Keep in Your Wallet

    That overstuffed wallet of yours can’t be comfortable to sit on. It’s probably even too clunky to lug around in a purse, too. And with every new bank slip that bulges from the seams, your personal information is getting less and less safe. With just your name and Social Security number, identity thieves can open new credit accounts and make costly purchases in your name. If they can get their hands on (and doctor) a government-issued photo ID of yours, they can do even more damage, such as opening new bank accounts. These days, con artists are even profiting from tax-return fraud and health-care fraud, all with stolen IDs. We talked with consumer-protection advocates to identify the eight things

  • UA
    Fox Business

    Under Armour Investors Punish CEO Kevin Plank

    Under Armour (NYSE:UA) CEO Kevin Plank is starting to sound like a broken record and investors are losing patience. The stock is seeing its biggest single-day loss in eight years, amid heavy volume, even as Plank downplayed concerns about the company’s declining growth rate on Tuesday. This doesn’t mean the demand for the Under Armour brand has disappeared, but it certainly hasn’t reappeared dollar-for-dollar in our distribution,” a seemingly-frustrated Plank said during post-earnings conference call.

  • Wells Fargo could see almost half its customers leave bank over scandal, management consulting firm cg42 says
    San Francisco Business Times

    Wells Fargo could see almost half its customers leave bank over scandal, management consulting firm cg42 says

    Steve Beck, founder and managing partner at cg42, told the San Francisco Business Times that the 14 percent of Wells Fargo customers planning to leave the bank would be far higher if not for the difficulty in moving to a new bank. No doubt Wells Fargo's rivals will be big winners if more customers exit Wells Fargo (NYSE: WFC). Credit unions, community banks and even Charles Schwab Bank (NYSE: SCHW) already appear to be benefitting from Wells Fargo's scandal. Cg42 says Bank of America (NYSE: BAC) and Chase Bank (NYSE: JPM) could also be big beneficiaries, given their national presence. On top of the 14 percent of existing customers that cg42 sees walking out the door at Wells Fargo, the consulting

  • 10 Worst States for Taxes on Your Retirement Nest Egg

    10 Worst States for Taxes on Your Retirement Nest Egg

    Retirees have special concerns when evaluating state tax policies. For instance, the mortgage might be paid off, but how bad are the property taxes—and how generous are the property-tax breaks for seniors? Are Social Security benefits taxed? What about other forms of retirement income—including IRAs and pensions? Does the state impose its own estate tax that might subtract from your legacy? The answers might just determine which side of the state border you’ll settle on in retirement. These 10 states impose the highest taxes on retirees, according to Kiplinger’s exclusive 2016 analysis of state taxes. Three of them treat Social Security benefits just like Uncle Sam does—taxing as much as 85%

  • Politics
    Bloomberg Video

    Clinton: Trump ‘Declaring Defeat’ with Mosul Tweet

    Oct. 24 -- At a campaign rally in Manchester, New Hampshire, Hillary Clinton slammed Donald Trump for a tweet in which he said the attack on Mosul is “a total disaster.” She said it was dangerous and proves the GOP nominee is unqualified to be commander-in-chief.

  • Nurse who survived Ebola settles with Texas hospital system
    Associated Press

    Nurse who survived Ebola settles with Texas hospital system

    A nurse who contracted Ebola two years ago while caring for the first person to be diagnosed in the U.S. with the deadly disease settled a lawsuit Monday against the parent company of the Dallas hospital where she worked. Attorneys for Nina Pham announced the settlement with Texas Health Resources. Pham contracted Ebola in the fall of 2014 while caring for Thomas Eric Duncan at Texas Health Presbyterian Hospital Dallas.

  • AAPL
    Money Talks News

    Apple Says 90 Percent of These Amazon Products Are Fakes

    A new lawsuit filed by Apple contends that 90 percent of iPhone devices and Apple accessories it recently purchased from Amazon were fakes. Apple says it purchased the products directly through Amazon, not a third party. Amazon is not named in the lawsuit, according to an Associated Press report.

  • Why Thousands of Combat Vets Have to Repay Their Enlistment Bonuses
    The Fiscal Times

    Why Thousands of Combat Vets Have to Repay Their Enlistment Bonuses

    The watchdog charged with monitoring how American money is spent in Afghanistan has in recent years identified projects in which hundreds of millions of taxpayer dollars have been wasted or gone missing: More than $100 million in over-budget expenditures to build the Afghan Ministry of Defense building and $150 million blown on luxury residences for members of the task force charged with rebuilding the Iraqi and Afghan economies, for example. The military has been trying to claw back excessive bonuses that the California National Guard paid to about 10,000 veterans – some of whom went on multiple combat tours – according to The Los Angeles Times. The Times says that with ongoing wars in Iraq and Afghanistan 10 years ago, the military was eager to boost re-enlistment and in many cases offered incentives of $15,000 or more that went beyond what was allowed.

  • For some low-income workers, retirement is only a dream
    Associated Press

    For some low-income workers, retirement is only a dream

    The photo and his story went viral and thousands of people donated more than $384,000 for his retirement. With no money saved for retirement, home care worker Gwen Strowbridge, 71, of Deerfield, Florida, plans to stay on the job until she can't physically work anymore. Studies have found that about one-third of low wage workers like Strawbridge say they'll never be able to afford retirement.

  • Wells Fargo fallout: Study says it's only going to get worse

    Wells Fargo fallout: Study says it's only going to get worse

    "While the lion's share of Wells Fargo customers we surveyed had not directly reported being affected by the scandal, it didn't matter," Steve Beck, founder of cg42 and a competitive strategy expert, said in a phone interview.

  • Ex-wife of former Subway pitchman Jared Fogle sues company
    Associated Press

    Ex-wife of former Subway pitchman Jared Fogle sues company

    The ex-wife of former Subway pitchman Jared Fogle is suing the restaurant chain for damages, saying the company received at least three reports indicating his sexual interest in children but failed to take proper action and continued promoting him as its spokesman. Katie McLaughlin said at a news conference Monday that she filed the lawsuit in Hamilton County Superior Court because she has questions about Subway's actions and inactions and wants to someday have answers for her two children, who are now 3 and 5 years old. Did they ever notify the authorities?" said McLaughlin, who said she was "shocked" to learn the accusations against her husband.

  • Ex-Intel (Nasdaq: INTC) workers are surveying laid-off employees
    Portland Business Journal

    Ex-Intel (Nasdaq: INTC) workers are surveying laid-off employees

    The ad hoc group formed by ex-Intel employees in the wake of the company’s massive global layoffs wants to know what thousands of their laid-off colleagues are up to. To do that, they have launched an online survey. It’s been six months since Intel said it would lay off 11 percent of its global workforce or 12,000 workers. of those cuts were in Washington County and thousands more were offered early retirement. A group called Intel Eliminati, created following a smaller layoff in 2015, took on a greater role connecting former co-workers with each other, and, hopefully new job opportunities. But, questions remain about how many of these former Intel folks have landed in new jobs. “We are going

  • Trump Surrogates Continue Their Apologist Tour to Election Day
    The Fiscal Times

    Trump Surrogates Continue Their Apologist Tour to Election Day

    It’s a thankless job being a Donald Trump surrogate these days. The job fell to campaign manager Kellyanne Conway and Republican National Committee Chairman Reince Priebus this weekend, and both twisted themselves in verbal knots casting the Trump campaign as something other than a foundering ship that’s headed to the bottom. After promising to deliver a “closing argument” in a speech on Saturday in Gettysburg, PA, Trump instead dedicated part of his remarks to promising to sue each of the dozen or so women who have accused him of sexual assault.

  • Business

    Bill Miller Buys Valeant, Sees It Doubling, Likes Financials

    Bill Miller, who is best known for beating the S&P 500 Index for 15 straight years, says he has been buying Valeant Pharmaceuticals International Inc. and financial stocks such as OneMain Holdings Inc.Miller said on CNBC that he purchased shares of Valeant

  • Fannie Mae streamlines U.S. mortgage underwriting

    Fannie Mae streamlines U.S. mortgage underwriting

    Fannie Mae said on Monday it has launched a program to streamline its underwriting on mortgages for some borrowers that uses electronic data instead of physical proof of their income, assets and employment.

  • Best Vanguard Funds for Your Retirement Savings

    Best Vanguard Funds for Your Retirement Savings

    Vanguard is the biggest fund company in the land, with more than $3 trillion in assets. So chances are high that many retirement savers have access to Vanguard funds in their 401(k) plans. But size is no guarantee of good results. Thirty-four Vanguard funds appear on a list of the 105 most popular mutual funds in employer-sponsored retirement savings plans. No other fund company comes close. Not surprisingly, of the 34 most popular Vanguard funds in retirement plans, 15 are index funds. And nine more are target-date portfolios—those set-it-and-forget-it funds that shift over time to more conservative allocations as the fund nears its target year. The remaining 10 are actively managed. We didn’t

  • Technology
    Yahoo Finance Video

    Inside Apple's first MacBook Pro and iMac redesign in years

    Investors and customers will be eyeing Apple's big unveiling of a new line of computers, which is expected to happen Thursday at its Cupertino headquarters. Major changes are expected, particularly for the iMac and the MacBook Pro, which hasn't had a major redesign in over 4 years.

  • Under Armour May Be Wearing Out Its Welcome
    The Street

    Under Armour May Be Wearing Out Its Welcome

    In the last year, shares of Under Armour (UA)  are down 19% to around $38. Short-sellers crushed the stock after Sports Authority filed for bankruptcy. Under Armour reports third-quarter results on Tuesday. Can UA get investors get back in the game? Investors in Under Armour have had a difficult year, especially after that Sports Authority bankruptcy because the shorts thought UA's product sales would be hurt by the liquidation. In addition, in the second quarter management said it would take an impairment charge of approximately $23 million related to the liquidation. Of the estimated $163 million worth of sales Under Amour expected to come from Sport Authority, management said it would only

  • Teacher pensions under fire: 5 tips to prepare for retirement

    Teacher pensions under fire: 5 tips to prepare for retirement

    If you’re a teacher, the promise of a good retirement pension may have been a selling point when you took the job. But concerns over the funding of these pensions have some wondering whether their benefits will be there for them in full after their last day of work. Critics warn that pensions are at risk of severe underfunding in some states, and righting them hinges on tax increases so local governments can contribute their share. They say some pension funds won’t be able to generate the kinds of returns on investment that they’re banking on to keep them going. And as people live longer, they’re spending more years in retirement—collecting more pension dollars. Some have suggested teachers adopt

  • Oil dips on Buzzard restart, Iraq; U.S. crude tests below $50

    Oil dips on Buzzard restart, Iraq; U.S. crude tests below $50

    Oil prices dipped on Monday, with U.S. crude briefly falling below $50 per barrel, on news of the impending restart of Britain's Buzzard oilfield and Iraq's wish to be exempted from OPEC production cuts. Iraq's oil minister Jabar Ali al-Luaibi said the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC) wanted to be exempt from output curbs as it needed more money to fight Islamic State militants. OPEC hopes to remove about 700,000 bpd from an estimated global supply of 1.0-1.5 million bpd.

  • Blighted lives: The true cost of diabetes
    BBC News

    Blighted lives: The true cost of diabetes

    Steven Woodman walks like an old man. He needs a stick to maintain his balance as he hobbles forward. Steven is only in his late 50s, but the loss of three toes on one foot means he's unsteady on his feet. It is type 2 diabetes that has led Steven to where he is now. More accurately, it's ignoring the warnings and advice around diabetes that has left him facing a life of disability. He was diagnosed with type 2 diabetes, closely linked to lifestyle and weight gain, when he was still a young man. Steven, who lives in Shrewsbury, freely admits that, at the time, he ignored his GP's advice. "I was in denial. I never took it that seriously, so I carried on eating, going to the pub - doing things

  • Toyota again leads U.S. auto reliability survey, Buick surprises

    Toyota again leads U.S. auto reliability survey, Buick surprises

    Two Toyota Motor Corp brands again led the annual reliability survey from Consumer Reports magazine, and General Motors Co's Buick was the first American brand in at least 35 years to crack the top three, the consumer magazine said on Monday. It was the fourth straight year that Lexus and Toyota finished in the two top spots, and they have had an outstanding performance since Consumer Reports began tracking brand reliability in the early 1980s.

  • Business

    AT&T’s Big Dividend Is Getting Even Bigger

    You might have missed it amid the merger hullabaloo. But AT&T (T), already much-loved by yield-seeking investors, upped its dividend on Saturday, along with announcing its its plans to buy Time Warner (TWX). It wasn’t a very big increase as these things go. AT&T declared a quarterly dividend of 49 cents per share, or $1.96 annualized — a 2.1% increase from the current 48 cents a quarter payout. The dividend will be payable on February 1 next year to stockholders of record on January 10. The new dividend yield, assuming a steady stock price, is 5.3%, up from 5.2%. AT&T says the merger should improve its dividend coverage ratio. Wells Fargo analyst Jennifer Fritzsche implies that the merger could

  • Jared Fogle's ex-wife is suing Subway, alleging that it ignored complaints about his sexual interest in children
    Business Insider

    Jared Fogle's ex-wife is suing Subway, alleging that it ignored complaints about his sexual interest in children

    The lawsuit, filed on behalf of Kathleen McLaughlin, says Subway was notified at least three times about Fogle's "sexual interest in and activity with children" but kept featuring him in ads and did not notify authorities. "As early as 2004, Subway's then-senior vice president of marketing received a complaint that Jared had approached a young girl at a promotional event for a Las Vegas Subway franchise for a sex act," the suit alleges.