Working Paper No. 3: Assessing Funding Costs and the Net Impact of Government Policy on Large Banks

This working paper, entitled Assessing Funding Costs and the Net Impact of Government Policy on Large Banks, presents a framework for evaluating existing evidence on bank funding costs, as well as ongoing regulatory reform efforts and the net effect of regulation on funding. Several recent policy proposals focused on large U.S. banks either state or imply that large banks enjoy lower funding costs as a result of implicit government support—sometimes citing academic literature to back up these claims, but often assuming that the TBTF premise is an established fact. This is cause for concern: The conclusions to be drawn from and government policies to be shaped by the TBTF debate are far too important to be decided on the basis of limited evidence that primarily focuses on correlations between bank size and funding costs. Instead, empirical work should focus on attempting to estimate the causal effect of bank size on potential funding cost differentials. Furthermore, the assessment of the efficiency of various regulatory policies should take into account the impact of these policies for the largest banks and the potential implications for real economic activity

The Clearing House

July 2014

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