As the first round of submissions to the Federal Government’s Financial Systems Inquiry closed this week there was a timely reminder that the fundamental cause of the global financial crisis is still deeply embedded in the banking system.
The world’s wealthiest and most powerful banks still operate behind the shield of being “too-big-to-fail” (TBTF), an issue that former US Federal Reserve chairman Ben Bernanke fingered as a major factor in the meltdown and the ensuing economic calamity that still haunts markets and economies worldwide.
Both the International Monetary Fund and the Fed have just published studies showing that, not only did the TBTF policy encourage a coterie of banks to place bigger and riskier bets, it is the taxpayer who largely underwrites the whole operation.
A team of economists in the Fed’s New York office were first out of the blocks last week with a study of more than 200 banks in 45 countries which found “an increase in government support leads to a higher ratio of impaired loans” – that is loans in default or close to default.
The study was based on 2009 data, so it did not include the impact of any recent reforms.
However it did analyse so-called behavioural issues, such as whether banks that ratings agencies classify as likely to receive government support, increase their risk taking.
On the question of behaviour and the interaction of ratings agencies, the Fed study is fairly blunt.
“The results show … that a greater likelihood of government support leads to a rise in bank risk taking,” the report concluded.
The IMF study, published this week, found something similar, but managed to put some numbers on the cost to taxpayers.
The big banks in the US were subsidised by up to $US70 billion in 2012. In Europe it was up to $US300 billion and in the UK and Japan up to $US110 billion.
Globally, the IMF says the TBTF subsidies are provided in a variety forms, from loan guarantees to direct cash injections.
That insurance policy allows the big banks to borrow at far lower rates than their less protected smaller rivals.
As the IMF notes, “those lower funding costs represent an implicit public subsidy to large banks.”