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Have Big Banks Lost Their Funding Advantage?

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WASHINGTON — A government report detailing the funding advantage the biggest banks receive is likely to be unveiled on July 31, according to sources familiar with the matter.

The highly anticipated Government Accountability Office report, requested by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., is the second part of a study begun last year to ascertain the advantages the largest banks receive due to their perceived "too big to fail" status.

Brown is expected to call a Senate Banking subcommittee hearing on July 31, when the report is released to the public for the first time, sources said. The hearing would be the last day Congress is in session before it goes on August recess.

Alternatively, Brown or Vitter, as the initial requesters of the report, could put a 30-day hold on the release of the GAO report, but sources consider that unlikely at the moment.

While the final details of the report remain unclear, several sources said the GAO was expected to say the funding advantage held by the largest banks has been reduced. That may not be enough for big banks to declare victory, however, as the size of the subsidy could change over time, potentially increasing in the event of another crisis. Sources added that the GAO was unlikely to offer its own concrete estimate of the exact amount of the advantage, instead presenting multiple methodologies that could be used to calculate a subsidy.

Industry observers suggested Treasury Secretary Jack Lew has already given hints of the outcome of the study, noting recent comments he made at two oversight hearings last month where he said the funding advantage has been "definitely dramatically reduced."

"The assumption that there is a price advantage is going way down," said Lew, who was pressed by Brown at a Senate Banking Committee hearing. "I'm not saying, 'It's eliminated.' It might be. There are some who argue [that]. But I think that in terms of the market advantage, it is certainly shrinking, if not gone."

A Treasury spokesperson said the secretary has consistently reiterated the agency's long-standing position that the Dodd-Frank Act ended "too big to fail" as a matter of law.

Still, Jill Hershey, executive managing director and head of government affairs at The Clearing House, and others have emphasized the importance of the secretary's comments.

"Lew made a critical point — current research demonstrates that any unfair funding difference for large banks has either been dramatically reduced or eliminated," Hershey said.

But some said Lew's comments may not be an indication of the outcome of the GAO's study.

"I don't think he would have said that without the data, but I don't know the data is from the GAO. There are other places it could have come from," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics.

Big banks and the industry groups that represent them have pointed to their own studies as proof that any difference in funding is not necessarily attributable to a perceived government guarantee. They have also noted an independent study by the International Monetary Fund released in March, which showed that the funding advantage for U.S. banks has dwindled to 15 basis points, significantly less than for their United Kingdom and European counterparts.

But observers remain unconvinced. They say any reduction in the subsidy may not be due to regulatory reform but by factors attributable to the economic cycle. If the market fears another bailout or crisis, the size of the subsidy could once again shift.

"This notion that the subsidy is lower now than it was during the crisis — that's hardly news," said Cornelius Hurley, the director of Boston University's Center for Finance, Law and Policy. "Of course it's lower. In the crisis, they were giving out money … but we're still in an environment of near-zero interest rates, so a lot of banks can raise money very cheaply. Naturally the differential would be smaller today."

Hurley added that the real issue will be the GAO's consideration of how market perception, and thus the size of the subsidy, will continue to change under more adverse economic conditions.

"I'm hoping that at least the GAO comes up with a methodology for measuring it, so even if it is down, we can chart its growth over time," he said.

Observers said that even if the GAO concludes the subsidy is lower, it is unlikely to offer its own specific estimate.

"I would be very surprised if this GAO report comes out and says that 'too big to fail' banks don't have any market advantage [and] there is no implicit backstop," said Marcus Stanley, policy director of the Americans for Financial Reform. "On the other hand, they may not feel confident putting an exact number on the value of the backstop. The GAO tends not to want to pin themselves down analytically."

One of the challenges in figuring out funding costs and "subsidy allegations" is that the data involved is often based on outdated information. Many studies also fail to do a good job differentiating efficiencies in capital market access for larger institutions vis-à-vis any "too big to fail" assumptions from counterparties, said Petrou.

Some studies, including one recently done by the Federal Reserve Bank of New York, have been harshly criticized for failing to use current data available to track the impact of the regulatory reform law on any large bank funding advantage.

"If [the GAO] does the same thing the NY Fed did and uses pre-Dodd-Frank data, that would be irresponsible," according to one industry source. "I would hope they would look at current data to the extent they can."

Other observers suggest that in order for the GAO's study to be robust, it will not only have to incorporate current post-Dodd-Frank conditions, but also normalized recent market developments and structural issues.

"It's intended to be the definitive study," Petrou said. "I think one can't say that it will be until one sees it. It's going to depend on the study how credible it is."

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