In the fourth paper in its Working Paper Series on the Value of Large Banks, The Clearing House builds on and provides evidence supporting the conclusion drawn in its Third Working Paper that the cost of compliance with regulations imposed on large banks must be factored into any assessment of whether large banks enjoy an unfair funding advantage. The fourth paper estimates the costs to the largest U.S. banks of complying with certain regulations imposed on those institutions and concludes that those regulatory costs are significant. In light of this, the paper recommends that policymakers should continue to consider the net impact of government policy by estimating the compliance costs to the largest U.S. banks of certain regulations imposed on those institutions and concluding that those regulatory costs are significant. 

Policymakers Should Continue to Consider the Net Impact of Government Policy, as Many Regulatory Requirements Uniquely Impact Compliance Costs for the Largest Banks

In July 2014, the Government Accountability Office (“GAO”) issued a study concluding that any purported too-big-to-fail (“TBTF”) funding advantage for large institutions has largely disappeared and perhaps even reversed. In reaching this conclusion, the GAO study acknowledged that in order to fully assess whether large banks enjoy any purported TBTF advantage, consideration must be given to the costs imposed on large banks of complying with government policies and regulations that impact those institutions.

Requirements Mandated by or Derived from Domestic and International Financial Reform Efforts Impose Substantial New Costs Uniquely on Large Banks

Recently, The Clearing House conducted a study that estimated the regulatory costs for six U.S. G-SIBs, each with more than $500B in assets. The costs to these banks of complying with the G-SIB surcharge, the enhanced supplemental leverage ratio, a total loss absorbing capacity requirement, the liquidity coverage ratio, the net stable funding ratio, and deposit fund assessments, was found to be between $27 and $45 billion annually.

In light of the disappearance of any TBTF funding advantage, the Net Impact of Overall Government Policy with Respect to Large Banks has been to Impose Greater Costs on the Largest Institutions.

The Working Paper Series on the Value of Large Banks and additional thought leadership pieces on this topic can be found here.

The Clearing House, established in 1853 to bring order to clearing and settlement between banks, is the nation’s oldest banking association and payments company. Past issues of the Banking Brief are available here.