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New Study Finds Insignificant Difference in Funding Costs for Largest Banks

Mar 19, 2014

Download PDF of the Study



Jill Hershey

David Helene

New York  – March 19, 2014 – Today, an independent research report commissioned by The Clearing House Association was released that examines funding cost differences among U.S. banks. The study, authored by a leading global management consulting firm, Oliver Wyman, aims to contribute to the growing body of research regarding the measurement of so-called “too big to fail” (TBTF) effects on the funding costs of financial institutions.

The study examines deposit rate differences among banks of different sizes, and updates a widely-cited prior study, “Deposit Rate Advantages at the Largest Banks,” by Stefan Jacewitz and Jonathan Pogach, by using an expanded and updated version of the same source data (extending through 2012).

The study, authored by Aditi Kumar and John Lester of Oliver Wyman, found that money market deposit rate advantages for the largest banks were just four basis points at the end of 2012. Further, the study found evidence that this small difference may not be attributable to TBTF perceptions—that is, potential perceptions among market participants that the government would intervene to prevent the failure of a large financial institution.

Deposit rates are a natural focal point for analyses of funding cost differences because they are the most important funding source for all banks, comprising 80 percent of liabilities for small and medium sized banks and 60 percent of liabilities for the largest U.S. banks.

The study is among the first to examine funding costs up to 2012, thus capturing the period following the sweeping post-crisis regulatory changes that have directly targeted TBTF concerns. By contrast, most other studies have examined historical data over the last 10-20 years, up to 2010.

"Using recent data is critical for any study that aims to inform the dialogue about TBTF because policymakers and regulators in the U.S. have made enormous changes to how we regulate large banks,” said Bob Chakravorti, Ph.D., Managing Director and Chief Economist at The Clearing House Association. “This study is important because it captures the impact of those changes on the funding costs of large banks.

Policymakers and regulators have taken important steps in recent years to address TBTF perceptions, including higher capital and liquidity standards and regular stress tests, intended to make large banks less likely to become financially distressed. Additionally, the Dodd-Frank Act expressly prohibits taxpayer-funded bailouts and provides regulators with new tools to allow large banks to fail without triggering a crisis for the entire financial system.

The full research report can be found here.

About the Clearing House

Established in 1853, The Clearing House is the oldest banking association and payments company in the United States. It is owned by the world’s largest commercial banks, which collectively employ 1.4 million people in the United States and hold more than half of all U.S. deposits.  The Clearing House Association L.L.C. is a nonpartisan advocacy organization representing, through regulatory comment letters, amicus briefs, and white papers, the interests of its member banks on a variety of critically important banking issues. Its affiliate, The Clearing House Payments Company L.L.C., provides payment, clearing, and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated clearing-house, funds-transfer, and check-image payments made in the United States.

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