Why Should Taxpayers Give Big Banks $83 Billion a Year?

by Bloomberg.com  |  published on March 1, 2013

banks

On television, in interviews and in meetings with investors, executives of the biggest U.S. banks — notably JPMorgan Chase & Co. Chief Executive Jamie Dimon — make the case that size is a competitive advantage. It helps them lower costs and vie for customers on an international scale. Limiting it, they warn, would impair profitability and weaken the country’s position in global finance.

So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?

Granted, it’s a hard concept to swallow. It’s also crucial to understanding why the big banks present such a threat to the global economy.

Let’s start with a bit of background. Banks have a powerful incentive to get big and unwieldy. The larger they are, the more disastrous their failure would be and the more certain they can be of a government bailout in an emergency. The result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail.

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.

Big Difference

Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of $83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.

No comments yet - you can be the first!

Comments are closed.

Do you Love your country but hate your government?

Join your fellow Libertarians who seek a world of liberty; a world in which all individuals are sovereign over their own lives and no one is forced to sacrifice his or her values for the benefit of others. Join over 500,000 Americans who get their daily dose of minimal government and maximum freedom with The New Liberty Movement.

We know how important your privacy is and your information is SAFE with us. We’ll never sell
your email address and you can unsubscribe at any time directly from your inbox.
View our full privacy policy.