(Adds Breakingviews link)
By Emily Stephenson
WASHINGTON, July 31 Big U.S. banks' ability to
borrow at lower rates than smaller competitors has eroded since
the 2007-2009 meltdown but could return in a crisis, a U.S.
official said, previewing a highly anticipated report on whether
banks remain "too big to fail."
Most industry participants believe the 2010 Dodd-Frank law
reduced the likelihood the federal government would bail out big
banks again, said Lawrance Evans, director of financial markets
at the U.S. Government Accountability Office.
The long-awaited report, which looks at whether size gives
big banks an unfair advantage, is due on Thursday afternoon.
Evans previewed it in planned remarks for a Senate Banking
Committee hearing on Thursday.
Lawmakers, regulators and bank experts debate whether
investors are willing to lend to the biggest banks at lower
rates because they believe they would be bailed out in a crisis.
Bank critics say this amounts to a subsidy for being "too
big to fail."
Evans said most of the GAO's models showed that the biggest
banks actually had higher funding costs in 2013 than smaller
banks, based on an analysis of bond yield spreads.
But in hypothetical scenarios with credit risk as high as
2008, the peak of the financial crisis, the GAO found that big
banks' funding costs were lower.
"Today's report confirms that in times of crisis, the
largest megabanks receive an advantage over Main Street
financial institutions," Senators Sherrod Brown, an Ohio
Democrat, and David Vitter, a Louisiana Republican, said in a
statement. The two requested the GAO report.
Evans also said the Dodd-Frank law may have made the
financial system safer, meaning credit risk levels experienced
in 2008 might not return.
The law forces banks to rely less on debt, undergo annual
tests of their financial health and plan for their demise.
"These findings reflect increased market recognition of what
we have consistently said - Dodd-Frank ended 'too big to fail'
as a matter of law," a Treasury official said in a statement.
The International Monetary Fund said in April the subsidy
persists but had declined since the crisis. But a study
published by The Clearing House, a bank group, said the
advantage was negligible.
Evans said the GAO report's findings should be interpreted
cautiously because it was unclear why funding costs changed over
time. But reform advocates and bank supporters quickly weighed
in with their analyses Thursday.
"A subsidy, is a subsidy, is a subsidy and today's GAO
proves that there is indeed a taxpayer subsidy associated with
too-big-to-fail," said Camden Fine, president of the Independent
Community Bankers of America, which is critical of big banks.
Big banks said any funding cost difference had nothing to do
with investors' expectations of bailouts.
"The GAO's findings show the impact of the numerous
legislative, regulatory and industry-led reforms that have made
the U.S. financial system much less complex, stronger and more
resilient," said Rob Nichols, head of the Financial Services
Forum, which represents big banks.
(Editing by Bill Trott, Phil Berlowitz and Dan Grebler)