April 18, 2013 / 11:32 PM / 7 years ago

U.S. Treasury official questions existence of big bank subsidy

NEW YORK, April 18 (Reuters) - A U.S. Treasury Department official on Thursday rebuffed recent arguments that giant banks enjoy cheaper borrowing because markets think the U.S. government would bail them out in a crisis.

Mary Miller, Treasury’s undersecretary for domestic finance, said in prepared remarks for a speech at an economic conference in New York that it is not necessarily true that the biggest banks borrow more cheaply than smaller competitors can.

And even if they do enjoy such a subsidy, she said, it may not be because markets believe they are “too big to fail.”

“In the wake of the financial crisis, the largest banks’ borrowing costs have not only increased more than those of some regional bank competitors, but have also increased to higher absolute levels,” Miller said.

The debate has resurfaced in recent weeks over whether the 2010 Dodd-Frank law and other measures did enough to crack down on JP Morgan Chase & Co, Citigroup, Bank of America Corp and other big banks.

Many politicians and some regulators argue some banks are still so big that the government would support them, as was done during the 2007-2009 crisis, rather than let their failure threaten the stability of the financial system.

Because markets also believe the government would step in, these critics say, the biggest banks have the unfair advantage that they can issue debt more cheaply than smaller banks can.

Miller said this view is mistaken because the 2010 Dodd-Frank oversight law forbids regulators from bailing banks out with taxpayer funds.

As an alternative, Dodd-Frank required U.S. banking regulators to prepare for how to liquidate a massive failed bank in a future crisis.

Even if big banks do have lower funding costs, that could be explained by other factors, she said. For example, financial giants may have greater liquidity and a bigger pool of potential investors than smaller competitors.

“Research shows that large non-financial corporations enjoy a similar funding advantage over their smaller and less-diversified peers,” Miller said.

She also said regulators are making progress with efforts to make the financial system safer, such as boosting banks’ equity capital ratios and bringing transparency to the over-the-counter derivatives market.

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