The IMF Estimates Too Big to Fail Subsidy Is So Big It’s Bigger than Banks’ Profits Most Years

by Patrick Brennan

Since the financial crisis, it’s been assumed that big banks in the U.S. and Europe enjoy an implicit government subsidy due to the bailouts firms like them received in 2008. But the size of it is up for debate — and a recent estimate from the IMF, Matthew Klein of Bloomberg View calculates, means that the subsidy for big banks is larger than their profit margins.

“Systemically important” or “too big to fail” institutions borrow at noticeably lower rates than other banks with similar risk profiles, suggesting that an implied government backstop is allowing them to borrow more cheaply and therefore make more money than they would otherwise. The financial-services industry maintains that, while such an advantage was obvious during the worst of the financial crisis, it’s disappeared over time — but it doesn’t seem to have.

Just how big is the subsidy? Estimates range into the tens of billions of dollars every year. The IMF released a new report this week that pegs it at two different values: one, around $10 or 20 billion a year, and the other, much higher — higher, in fact, than the big banks’ profits every year from 2008 to 2012. In 2013, bank profits (thanks to a roaring stock market, in part) just barely exceeded the IMF’s higher subsidy estimate.

Here’s the chart Klein provides, which pairs the banks’ profits (in light blue) against the IMF’s lower-range estimate for the government subsidies (dark blue, about 10 to 20 percent of profits) and the higher-range estimate (gray).

By the higher-range estimate, the banks’ government subsidies have been greater than or almost equal their own profits in every year since the financial crisis, which is seen as one of the major expansions of the too-big-to-fail guarantee. As Klein notes, the IMF believes that its two approaches may both underestimate the true value of the subsidy.

The Dodd-Frank financial-reform law passed in 2010 and the Basel III international capital requirements agreed upon in 2011 were supposed to help reduce this subsidy, but the IMF doesn’t think they’ve done so substantially.

This isn’t a problem unique to the U.S., as you can see, the IMF sees Europe, Japan, and the U.K. providing, in some ways, even bigger backstops than the U.S. does: