(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Rob Cox
LONDON, Dec 12 (Reuters Breakingviews) - Has the too big to
fail problem been licked? The Bank of England and Federal
Deposit Insurance Corp sound pretty confident, declaring this
week they’re nearly in a position to resolve a systemic failure
without inflicting losses on taxpayers. It's hard to know
without a test case. But the signal from capital markets
suggests watchdogs may be on to something.
Though the wider public may still think big swinging bankers
will get bailed out in a crisis, investors in U.S. bank debt are
taking no chances. In fact, the nation's biggest financial
institutions are paying more to fund their loan books on a
relative basis in the credit default swaps market than are
similarly rated industrial companies. More importantly, it costs
them more than their smaller rivals.
The top six U.S. banks and brokers, those with balance
sheets larger than $750 billion, recently paid an average
premium on their unsecured five-year debt of about 129 basis
points above the risk-free rate, according to Credit Suisse's
Liquid US Corporate Index. Furthermore, the biggest banks paid
more than the average of 15 regional and trust banks also
analysed by Credit Suisse. Funding for these smaller
institutions cost 12 basis points less in the markets.
The implication is that despite their size and that some of
these banks were rescued in the 2008 panic, investors consider
holding their debt a riskier proposition. That bolsters claims
by regulators that new rules giving them the authority to
shutter failing banks are sinking in.
True, the bank deposit market may reflect lingering doubts.
FDIC data show that since the crisis, banks with over $10
billion of assets pay less to depositors than smaller ones. In
the second quarter, they paid 20 basis points less. This could
be down to more extensive branch and ATM networks, higher
marketing spending and a greater array of products than any
conscious decision by customers to keep savings in the vaults of
institutions perceived as infallible.
Until a major, failing bank is wound down by a government at
the expense of bondholders as well as shareholders the verdict
will be undecided on the fate of too big to fail. It's
encouraging, however, to see investors finally recognising the
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- The Bank of England and the U.S. Federal Deposit Insurance
Corp said in a joint paper released on Dec. 10 that each
country's plans for dealing with the types of cataclysmic
financial failures that marked the 2007-2009 financial crisis
would reduce risks to financial stability.
- "The FDIC and the Bank of England have developed
resolution strategies that take control of the failed company at
the top of the group, impose losses on shareholders and
unsecured creditors - not on taxpayers — and remove top
management and hold them accountable for their action," they
said in the paper.
- The new authorities to seize and resolve so-called global
systemically important financial institutions came in the United
States from the 2010 Dodd-Frank financial reform law, and in
Britain from the anticipated approval by early 2013 of the
European Union Recovery and Resolution Directive.
- Report: link.reuters.com/vug64t
- Reuters: US, UK bank seizure plans focus on absorbing
losses - regulators [ID:nL1E8NA063]
Symphony or cacophony? [ID:nL4N09K355]
RIP TBTF? [ID:nL1E8HF30U]
- For previous columns by the author, Reuters customers can
click on [COX/]
(Editing by Jeffrey Goldfarb and David Evans)
Keywords: BREAKINGVIEWS TBTF/
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