The too big to fail subsidy debate Is over

By Paul Walker 08/04/2014 4

Or so says Simon Johnson at The Baseline Scenario blog. Johnson writes,

No doubt there is still a lot of shouting to come, but this week a team at the International Monetary Fund completely nailed the issue of whether large global banks receive an implicit subsidy courtesy of the American government. Is there a subsidy, is it large, and how much damage could it end up causing to the broader economy?

The answers, in order, are: yes, there is an implicit subsidy that lowers the funding costs for very large banks; the subsidy is big, with costs of borrowing for these banks lowered by as much as 100 basis points, i.e., 1 percentage point; and yet this large scale of implicit support is small relative to the macroeconomic damage that is likely to be caused by the high leverage and incautious risk-taking that the subsidy encourages.

That subsidising banks, implicitly or explicitly, is dumb and likely to lead to big trouble is something of a no brainer but its good to see that the IMF is willing to come out and say so. This is a step in the right direction. Now for the big question, What to do about it? Answers on the back of a postcard should be sent to just about any world leader you can name.

4 Responses to “The too big to fail subsidy debate Is over”

  • So, the evidence is in. When the beneficiary is a bank, they DO spend on the banking equivalent of big screen TVs, cigarettes and booze…

  • It is more that they are spending on covering stupid behaviour by banks.They are creating big moral hazard problems by inducing risking behaviour by banks because of the (implicit/explicit ) subsidies.

  • Thats the problem though – the banks’ behaviour wasn’t “stupid”. It was entirely rational and foreseeable given the incentives. That fact that its claimed after the fact that the banks were the stupid ones just shows how little regulators had in terms of insight.

    Blinded by the light of ideology I suspect. I do wish they would walk towards it.

  • The actions by governments were/are stupid and these resulted in what were stupid actions by banks in that they are not the actions that would have occurred without the subsidies. That is, more risk is taken by banks than would be the case without subsidies. While its true the banks – and other subsidized industries – acted rationally given the incentives they face, the problem is with those incentives