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IMF- TBTF hydra alive and well

The IMF has issued its latest warning on the perennial problem of TBTF banks. Chapter 3 of its bi-annual Global Financial Stability Report presents an interesting comparison of different approaches to calculating the TBTF subsidy consequent upon implicit government bailout\guarantee. Its broad approach is to compare CDS prices and credit ratings across larger and smaller banks, while the amount has fallen since the crisis, it still remains sizable. Highlights follow:

  •  Subsidies for the largest banks are “like insurance for which banks don’t need to pay a premium”.
  • The subsidy amount has  fallen since the financial crisis, but remains sizeable, “All in all   … the expected probability that systemically important banks will be bailed out remains high in all regions.”
  • “Progress is under way but the subsidy estimates suggest the issue of too-important-to-fail is still very much alive,” – Gaston Gelos, senior  IMF analyst.
  • Difficulties in calculation notwithstanding- banks receive up to $590B in implicit public TBTF subsidies. The Eurozone heads  the pack with a total $90-300b., $20bn-$110bn in the UK, $25bn-$110bn in Japan, and $15bn-$70bn in the US.
  • Subsidies include bankers who still have a “heads I win, tails you lose” attitude, and investors who lend at lower cost to banks than they might otherwise.

The NY Fed came to similar conclusions in a report published on the 25th March 2014; their bank-friendly conclusion was that while TBTF banks increase systemic risk, the upside is that they benefit from a 0.31% funding advantage. Joao Santos’ report also highlights the uneven split between US mega-bank implicit subsidies- the highest rated bank (JP Morgan) is estimated to take the lion’s portion of the TBTF discount at approx. $5bn p.a., a remaining $3.5 bn. is shared by the next four in size. The report only considered data up to 2009.

Mark Carney, in his role as chairman of the FSB, yesterday admitted that a solution to the issue was taking too long, although progress by European banks was being underestimated.. International regulators are aiming “to break the back” of the problem by the G20 summit in November.

While the TBTF crisis catchphrase has morphed into TITF- variously read as Too Important\Interconnected to Fail; the illness remains the same- concentration of risk, stifling of competition and the assiduous cultivation of moral hazard.  Five years on from the crisis, the various cures have only served to entrench the cancer. The labyrinthine complexity of the new regulations combined with the exorbitant costs of compliance erect a fortress-like barrier to new market entrants, siphon profit to the ever-metastasising TBTF institutions and create new risk foci  in the shape of central clearing and immobilisation of collateral f lows. For now, FTGB- “Fail to Get Bigger” still looks like sound business strategy.

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