Mr. Fed Chief, Should Big Banks Repay $83 Billion in Annual Subsidies?

Mr. Fed Chief, Should Big Banks Repay the $83 Billion in Annual Subsidies?The nation’s biggest banks are too big to fail, a precept that paves the way for these institutions to borrow at lower rates than any other entities, amounting to an annual $83 billion in government subsidies to the likes of JPMorgan Chase, Bank of America, Wells Fargo and the other giants.
That’s what researchers found recently as part of a report published by Bloomberg, and it became the stuff of a compelling line of questioning today between Sen. Elizabeth Warren, the newly-minted Democrat from Massachusetts, and Federal Reserve Chairman Ben Bernanke.
Warren questioned Bernanke during his latest appearance before the Senate Banking Committee to discuss the economy and monetary policy.
Warren asked the Fed chief whether big banks should repay taxpayers for the billions of dollars they save in borrowing costs because of the credit market’s belief that they won’t be allowed to fail, repeatedly citing the Bloomberg study, which concludes that these subsidies match the big banks’ annual profits.
At first, Bernanke questioned the accuracy of the report and the $83 billion figure, but he then conceded that big banks get some subsidy.
The Fed chief said the market was wrong to grant banks any subsidy in the form of lower borrowing costs. He also insisted that the government will let banks fail based on mechanisms mandated by the 2010 Dodd-Frank financial reform law. The reform gives policymakers the tools to safely shut down failing banks deemed a threat to the U.S. economy, he claimed.
But after Warren kept up her questioning of the “too big to fail” issue, Bernanke wavered.
“The subsidy is coming because of market expectations that the government would bail out these firms if they failed,” Bernanke said. “Those expectations are incorrect. We have an orderly liquidation authority. Even in the crisis, we — uh, uh — in the cases of (insurer) AIG, for example, we wiped out the shareholders…”
“Excuse me, though, Mr. Chairman,” Warren said. “You did not wipe out the shareholders of the largest financial institutions, did you, the big banks?
“Because we didn’t have the tools,” Bernanke responded. “Now we could — now we have the tools.”
Bernanke later suggested that the government’s tools to wind down a big bank that is failing were still a work in progress — or at least that financial markets have not yet been convinced of their power.
“Some of these rules take time to develop — the orderly liquidation authority, I think we’ve made progress on that,” Bernanke said. “We’ve got the living wills — I think we’re moving in the right direction … We do have a plan, and I think it’s moving in the right direction.”
Warren later said that big banks are probably loath to give up any market subsidy — $83 billion or otherwise.
“Big banks are getting a terrific break, and little banks are just getting smashed,” Warren said.
“I agree with you 100 percent,” Bernanke said.
Watch the Warren-Bernanke exchange on the Huffington Post.

One thought on “Mr. Fed Chief, Should Big Banks Repay $83 Billion in Annual Subsidies?

  • February 26, 2013 at 5:54 pm
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    I think “To Big to Fail” has turned to “To Big to Fail Quickly”.
    It is a start!

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