Yesterday Moody’s put the debt of four of the six big U.S. banks – GS, JPM, MS, and WFC – on review for downgrade, and the other two – C and BAC – on the amusing “review direction uncertain,”1 because Moody’s is becoming increasingly convinced that, if those banks blew up, the government would not bail out their holding company unsecured debt. Not entirely convinced – it’s just “consider[ing] reducing its government (or systemic) support assumptions to reflect the impact of US bank resolution policies” – but more convinced, anyway. More convinced than it was in March, when it announced “that it would reassess its support assumptions for bank holding companies in the US and that it would consider whether to revise these assumptions by the end of the year.”
Too Big To Fail
Some analysts at the Bank for International Settlements have found a new way to unwind too-big-to-fail banks painlessly, which I guess is newsworthy; here is a good summary, and here is the actual paper. The basic idea is to resolve a bank over the weekend by writing down its debt by some regulator-chosen amount X, giving it X more capital, which is held by a new temporary holding company. Then the bank reopens for business on Monday with more equity and less debt. The holding company eventually sells its equity in the bank to the market, and distributes the proceeds “to [the old bank's] creditors and shareholders strictly according to the hierarchy of their claim.” Here are some blue boxes:
The main attraction of this, besides speed, is that it provides a market mechanism for determining how much senior creditors lose: regulators decide how much of the bank’s senior liabilities are converted into holdco liabilities, but those holdco liabilities retain their seniority over subordinated liabilities and equity, and ultimately the amount of writedowns suffered by the senior (and junior for that matter) debtholders depends on how much the bank’s equity is ultimately worth when the holdco sells it.
I feel like I’m on the “the too-big-to-fail subsidy is negative!” beat, even though I only kind of believe it, so in that spirit here is a fun paper from Goldman Sachs’ Global Markets Institute1 that finds that the too-big-to-fail subsidy is negative. That is, Goldman concludes, contrary to popular belief, that the biggest U.S. banks actually don’t have a funding advantage over smaller banks due to the possibility that they’ll be bailed out by the government. Here is the money picture:
If that’s hard to read: the bonds of the six biggest U.S. banks – the ones whom everyone thinks the government would rescue if they blew up, JPM-C-BAC-GS-MS-WFC – yielded on average 6bps more than the average non-TBTF-bank bond before the start of the crisis in 2007. They traded hundreds of basis points tighter during the crisis (TBTF subsidy!), but now are back to trading wider: Read more »
It’s not Venezuela, now that old Hugo is gone. It’s not Cuba. And it’s definitely not the U.S. Indeed, the ballsiest country on this side of the globe seems to be measuring its cojones against us, in a series of direct throw-downs. And Argentina’s are bigger. Read more »
The story so far is that a few days ago Bloomberg View claimed that the ten biggest U.S. banks got an annual subsidy of $83 billion from being too big to fail. That claim seemed silly to me, and I said so, and this weekend Bloomberg responded to that post saying, and I quote, “we weren’t kidding.” Apparently the people who keep the blogging rulebook believe that I now have to write a post in response to their response to my response to their original claim, and so this is that post. Actually this is that footnote, whatever.1
Up here let’s be super super naïve and just ask: how much do too big to fail banks pay to fund their balance sheets, and how much would they pay if they were smaller and failier and less government-supported? One dumb way to go about answering that is to actually just look at the cost of funding of some banks. We can start with the big five that Bloomberg uses – JPMorgan, BofA, Citi, Wells Fargo, and Goldman – and compare them to some smaller banks. Since Bloomberg seems to believe that Fitch believes that the TBTF banks would be rated around BBB- were it not for their TBTF-ness, we can compare them to some banks rated BBB- by Fitch. I chose five BBB- rated bank holding companies pseudorandomly from Fitch’s web page: Associated Banc Corp, TCF Financial Corp., First Horizon National Corporation, First Niagara Financial Group, and Zions Bancorporation.2 Then I just looked at how much those banks paid for their funding (interest expense, preferred dividends), compared to how much the big five banks pay.
Here are some average numbers: Read more »
Why Should Taxpayers Give Big Banks A Subsidy of $83 Billion Per Year, Or Any Other Made-Up Number For That Matter?By Matt Levine
Bloomberg has an editorial today about how the government is subsidizing the top ten U.S. banks by $83 billion a year and maybe it should stop doing that. Because the editorial is getting a lot of attention, and because it is wrong, let’s discuss it.
Here is Bloomberg:
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.
Here are Ueda and di Mauro:
[W]hen issuing a five-year bond, a three-notch rating increase translates into a funding advantage of 5 bp to 128 bp, depending on the riskiness of the institution. At the mid-point, it is 66.5 bp for a three-notch improvement, or 22bp for one-notch improvement. Using this and the overall rating bonuses described in the previous paragraph, we can evaluate the overall funding cost advantage of SIFIs as around 60bp in 2007 and 80bp in 2009.
Let’s break that down. Their paper: Read more »
There’s nothing surprising, exactly, about this chart that Fitch sent out today, but it’s still sort of stark:
Once there was a land where bank debt was AA, AAA if it was particularly good or A if it was particularly dicey. Now AA is the new AAA and BBB is commonplace. The idea of risk-free unsecured lending to banks, implicit in things like Libor discounting, is over.
Right? I don’t entirely understand this proposal by House Republican John Campbell to require banks to “hold substantially more capital,” though the gist is basically that there’s a move to require banks to do more of their funding via long-term holdco debt. Here is a puzzling summary: Read more »