FDIC offers hope for the anti-too big to fail crew

February 23, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Rob Cox

The biggest American financial institutions are still benefiting from the perception that the government will always come to their rescue. But a slight narrowing in the gap between what mega-banks like JPMorgan and Bank of America and others in the industry pay for deposits may suggest a hint of progress. That offers hope for those who would like to eradicate the notion that some banks are too big to fail.

In fairness, the evidence is barely perceptible and may be fleeting. According to fourth-quarter figures released by the Federal Deposit Insurance Corp on Wednesday, the 107 U.S. banks with more than $10 billion of assets are still funding themselves ridiculously cheaply. The top banks paid just 77 basis points in annual interest to depositors in the quarter. That’s the lowest rate in the statistics published by the FDIC, which stretch back to the first quarter of 1984. Smaller banks, on average, had to pay customers around 1.18 percent.

That still suggests that depositors — whose cash is the cheapest and most stable source of funds for banks — believe their money is considerably safer parked in the vaults of the biggest banks. That may reflect their scale and ability to make proportionately much more money out of their assets, attributes that make large firms less prone to failure on their merits. But it also implies a continuing belief that the biggest banks won’t be allowed to fail.

Here, though, is the faint glimmer. The big banks may have paid 35 percent less than smaller ones to fund themselves with deposits in the final quarter of 2010. But that’s a slightly smaller discount than the roughly 38 percent seen in the preceding three months. That’s a small change that could easily be a statistical anomaly, but at least it’s in the right direction.

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