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All Sides Claim Victory in Wake of GAO Report on TBTF

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WASHINGTON — Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., continued to press their case over "too big to fail" on Thursday, in the wake of a new government report that raises fresh questions about the size of a market subsidy for the largest institutions.

The Government Accountability Office study presents a mixed picture on whether investor perception favors big banks due to the assumption that the government would again bail out a major financial institution in a crisis. The report, released Thursday afternoon, suggests that any subsidy the biggest banks receive has declined or even reversed since the financial crisis — though researchers also warn that the trend could again shift in a more challenging economy.

Industry supporters and critics alike were quick to respond to the study, with each side finding a favorable narrative embedded in the larger report.

Vitter lauded the report for changing the discussion at a hearing Thursday afternoon by the Senate Banking Committee's subcommittee on financial institutions and consumer protection, which was chaired by Brown.

"I think [the report] is very helpful, and it moves the debate significantly. Not long ago, a lot of folks led by the megabanks were denying any funding advantage, any 'too big to fail' subsidies. Now I think that debate is over," Vitter said. "Everyone agrees it exists and we're debating how big it is and for what reasons it's 'here' or 'here,' or wherever."

Industry supporters, meanwhile, cheered some of the key results in the GAO report, including the finding that more than half of the 42 methodologies the agency used estimated that big banks actually faced a funding disadvantage in recent years relative to smaller institutions.

"The GAO's key finding is that 'most models we estimated suggest that large bank holding companies had higher bond funding costs than smaller bank holding companies in 2013' — in other words that large banks are currently paying a negative subsidy, and are currently at a competitive disadvantage, not the advantage that some have claimed. That's a pretty large ball to hide, but hiding it was clearly the goal of the hearing," said one banking executive who spoke on condition of anonymity.

Tony Fratto, a partner at Hamilton Place Strategies, said that "critics will be critics, but even using their preferred methodology for estimating a perceived advantage, we're seeing success."

Still, Brown pushed back, raising questions about the underlying studies on which the GAO based its many methodologies.

"GAO oftentimes does a lot of, 'on one hand, on the other hand,' " the Ohio Democrat said. "And GAO went to the Chamber of Commerce and GAO used industry studies, and industry pays for a lot of good studies for itself, whether it's the chemical industry or whether it's Wall Street — no surprise there."

He also warned during the hearing that the GAO's estimate "contains many limitations, and is clouded by both extraordinary interest rate policies and a number of subsidies that are difficult to measure."

That's a point the GAO also underscored.

"It is important to know up front that this was a difficult task. Particularly because measuring investor perceptions is complicated," Lawrance Evans, director of the financial markets and community investment division at the GAO, said at Thursday's hearing. "Our report carries a heavy dose of caution and nuance and reflects the uncertainty underpinning our modeling effort."

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