Magazine article American Banker

Big-Bank Funding Remains Sizable despite Slip

Magazine article American Banker

Big-Bank Funding Remains Sizable despite Slip

Article excerpt

Byline: Harry Terris

In the first quarter, large banks' funding advantage over smaller rivals narrowed, but the gap - which opened up during the financial crisis in an apparent reaction to "toobigtofail" policies - remained wide.

Interest expenses were 0.75% of liabilities at banks with $100 billion or more of assets in the quarter, according to data from the Federal Deposit Insurance Corp. This was 47 basis points less than the average for banks with $10 billion to $100 billion of assets and 70 basis points less than for banks with $10 billion of assets or less.

Those gaps were down from peaks of 66 basis points less than the midsize group and 101 basis points less than the small group in the first quarter of 2009 - the first full quarter after the government began its shock-and-awe campaign to avert a collapse of the financial system with the Troubled Asset Relief Program - but wider than the gaps that prevailed for much of the decade (see charts). In fact, from 2005 through 2007, funding costs at small banks were less than or about even with those at large banks.

Government backing of large institutions whose downfall would threaten uncontainable economic damage clearly suppressed their funding costs in the first quarter and helped lift their net interest margins above those of small banks for the first time in more than seven years. However, additional factors also appear to have played a role.

Large banks' advantage over rivals in rates on domestic deposit portfolios has been even bigger than for overall funding - peaking at 68 basis points less than the average for midsize institutions and 105 basis points less than for small institutions, also in the first quarter of 2009 - though about 54% to 63% of such funding has been insured at large banks since the first quarter of 2003, compared with 69% to 82% at small banks. …

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