Understanding the Funding Cost Differences between Global Systemically Important Banks (G-SIBs) and Non-G-SIBs in the United States
27 Pages Posted: 2 Mar 2013
Date Written: March 11, 2012
We seek to determine the sources and the extent of funding cost differences between Global Systemically Important Banks (G-SIBs) and non-G-SIBs in the U.S. We build on earlier studies that have asserted that G-SIBs have had lower funding costs, and have attributed this 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. We contribute to the literature by examining the various sources of funding for a variety of U.S. bank holding companies through the recent full credit cycle, 2002-2011, controlling for firm-specific credit and macro-economic factors. We also introduce an analysis of systemic risk and determine the extent to which it might mask the funding costs benefits. We also evaluate the impact on funding costs of explicit support built into some issuers’ credit ratings.
We find 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 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 we evaluate the impact of firm size on CDS spreads in other industries, we find that there are significant spread advantages for larger firms in most industries.
Keywords: Too Big to Fail, TBTF, Funding Costs, Large Banks, Subsidy
JEL Classification: G21, G28
Suggested Citation: Suggested Citation