Understanding the funding cost differences between global systemically important banks (GSIBs) and non-G-SIBs in the USA

Michel Araten and Christopher Turner

Journal of Risk Management in Financial Institutions, 2013, vol. 6, issue 4, 387-410

Abstract: This paper seeks to determine the sources and the extent of funding cost differences between global systemically important banks (G-SIBs) and non-G-SIBs in the USA. It builds on earlier studies that have asserted that G-SIBs have had lower funding costs, which has been attributed to an assumed too-big-to-fail status. Most of the previous studies, however, failed to control for macro-economic factors and firm-specific credit risk and ignored funding costs at the bank holding company level. This paper contributes to the literature by examining the various sources of funding for a variety of US bank holding companies through the recent full credit cycle, 2002–2011, controlling for firm-specific credit and macro-economic factors. It also introduces an analysis of systemic risk and determines the extent to which this might mask the funding costs benefits. An evaluation is made of the impact on funding costs of explicit support built into some issuers' credit ratings. It was found that there are moderate cost advantages associated with G-SIB status with regard to domestic deposits and smaller cost advantages with respect to credit spreads on senior, unsecured debt. Overall, the impact on funding costs taking into account all funding sources over the full credit cycle is a reduction of 9 basis points (bps). Considering just the interest-bearing funding sources to which one might attribute government support, the weighted average cost of funds associated with G-SIB status is about 18 bps lower than for non-G-SIBs. When evaluating the impact of firm size on credit default swap (CDS) spreads in other industries, it was found that there are significant spread advantages for larger firms in most industries.

Keywords: ‘too big to fail’ (TBTF); funding costs; subsidy; large banks; global systemically important banks; uplift ratings (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2013:v:6:i:4:p:387-410

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