The big six biggest US lenders are not considered "too big to fail" by bond investors, according to a report from Goldman Sachs.
Goldman Sach’s new report has found that the big-six US banks by assets have had an average funding-cost advantage over smaller competitors of 0.31 percentage point since 1999, and the advantage was widest during the financial crisis. This reversed, however, so that the biggest banks now pay an average 0.10 percentage point more than smaller ones, the study found.
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According to some policy makers, the biggest US banks – JPMorgan Chase & Co, Bank of America Corp, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley – have an advantage due to cheaper borrowing costs, as bond investors assume the government will bail them out in a financial crisis.
Big banks depend more on bond-market funding than small lenders, which use deposits to fund their loans, according to the report, which asserts that the banks that sell more debt are more attractive to investors because the size of the bond issues makes them easier to trade.
"Investors are willing to pay for the benefits of liquidity, and large firms tend to have more liquid bonds. In fact, the added liquidity itself could account for the observed funding advantage for the largest banks," said the Goldman Sachs report.
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By GlobalData
