New Study on Bank Bond Spreads Finds No Evidence of TBTF Effects on Large Bank Funding Costs
FOR IMMEDIATE RELEASE
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Jill Hershey
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David Helene
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New York, NY – April 10, 2014 – Today, an independent research report commissioned by The Clearing House Association was released that measures too-big-to-fail (TBTF) effects from 2009-2013 based on differences in market spreads for senior unsecured bonds issued by U.S. bank holding companies.
The research updates a widely cited study of bond spreads by notable researchers from NYU by using a similar analytical model and extending the data set through 2013 in an effort to assess whether post-crisis bank bond spreads reflect the major legal and regulatory reforms efforts intended to combat TBTF.
Authored by John Lester and Aditi Kumar of Oliver Wyman, the report finds no evidence of TBTF effects on large bank funding costs. Specifically, while bond spread differences were observable during the financial crisis, the gap declined in subsequent years, becoming insignificant by 2013.
“These findings are consistent with what other independent studies looking at the most recent period have found: funding cost differences have narrowed precipitously and significantly in the years following financial regulatory reform,” said Bob Chakravorti, Ph.D., Managing Director and Chief Economist at the Clearing House. “The fact that the differential has essentially disappeared by 2013 suggests quite convincingly that the reforms are taking hold and dramatically changing market perceptions of risk and funding costs today.”
The analysis of bond spreads follows an initial report conducted by Oliver Wyman and released in March which examined deposit rate differences among banks. Together, these analyses are the first to examine funding costs up through 2012 and 2013, respectively, capturing the impact of financial regulatory reforms put in place by the 2010 Dodd-Frank Act.
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 more than 1.4 million people and hold more than half of all U.S. deposits. 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 U.S. 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 owner banks on a variety of systemically important banking issues.