WASHINGTON Top banks in the euro zone benefited from an implicit taxpayer subsidy of $90 billion to $300 billion in 2012 due to ongoing state support which makes them "too important to fail," the International Monetary Fund said in a report on Monday.
Subsidies in the United Kingdom and Japan may have been as high as $110 billion in the period of 2011-12, while they ranged from $20 billion to $70 billion in the United States, the IMF said in a chapter of its twice-yearly "Global Financial Stability Report."
The IMF, a Washington-based global financial institution, analyzes the economic and financial policies of its 188 member countries and warns about potential problems. Its report could influence regulators in the United States and Europe that are implementing tough new rules for the financial industry to minimize the likelihood and cost of bailing out big banks.
Bank assets have grown dramatically in many countries since 2000, while the number of banks has fallen. In most countries, the assets of the three largest banks make up at least 40 percent of total banking assets, while in Canada, France and Spain that figure is at least 60 percent, the IMF said.
That means problems or failure in one of a country's top banks could throw its entire financial system into chaos.
This problem only got worse in the wake of the global financial crisis in 2007-08, when many governments intervened in the banking sector or encouraged mergers to prevent banks from collapsing, according to the report.
"Countries emerged from the financial crisis with an even bigger problem: many banks were even larger than before and so were the implicit government guarantees," the IMF said.
The Fund said that funding advantage has gone down somewhat since 2009, especially in the United States, due to tighter regulations and effective supervision.
But the subsidies may be even higher for banks in the euro zone. And 'systemically important banks' still enjoy implicit subsidies of around 60 basis points on average compared to their less weighty peers.
The IMF used three different methods for calculating the funding advantage of top banks: comparing their bond yields to those of other banks; comparing actual credit default swaps for bank bonds to what they would be using just equity price information; and using credit rating agencies' estimates of government support.
While the three estimates diverged somewhat, they still showed that these top banks benefited from investors' belief that governments would rescue them in a panic situation.
The IMF said it may not be possible to remove 'too important to fail' subsidies completely, since governments cannot predict everything, and sometimes bailing out a bank may be better for the economy than letting it collapse.
Shrinking banks or revamping their structure also may not be a good solution, as there is some evidence that large banks enjoy economies of scale and scope that keep costs low for consumers and promote market liquidity. Restricting what banks do could also lead to riskier activities migrating into less regulated parts of the financial industry.
The IMF said regulators should instead focus on ensuring banks are less likely to fail, such as boosting the quality and size of capital buffers. It also recommended having banks pay a levy based on the size of their liabilities.
"Given the difficulty of completely ruling out bailouts in practice, some level of government protection, and thus some positive subsidy, may be unavoidable," according to the report. "Bank levies can allow governments to recoup part of it."
The IMF also called on countries to do a better job of coordinating bank resolution frameworks, especially for cross-border banks, or risk creating further problems. For example, poor coordination on resolving multinational failed banks fed into greater financial fragmentation in Europe.
"Local initiatives may well end up being mutually destructive," the IMF said.
(This story corrects year to 2012 from 'last year' in first paragraph)
(Reporting by Anna Yukhananov; Editing by James Dalgleish)