Here’s the problem: Wall Street banks get an implicit bank subsidy where they can borrow money for less than other financial institutions largely because creditors see them as “too big to fail.” Specifically, according to scholars at the IMF, these biggest banks get an implicit bank subsidy of around 0.8 percentage points.
Now, 0.8 percentage points doesn’t sound like much, and it’s not for typical Americans. But for banks that have trillions in assets, 0.8 percentage points can add up to billions.
Bloomberg, in their image above, shows that without these implicit multi-billion-dollar subsidies Bank of America and Citigroup would be bleeding. In short, too big has failed.
Here’s the article the image comes from. We strongly recommend reading it in full.
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.