Just how big is the benefit that too-big-to-fail banks receive from their implicit taxpayer backing? Federal Reserve Chairman Ben Bernanke debated just that question with Massachusetts senator Elizabeth Warren during a recent hearing of the Senate Banking Committee. Warren cited a Bloomberg study based on estimates from the International Monetary Fund that found the subsidy, in the form of lower borrowing costs, amounts to some $83 billion a year.
Bernanke, who has argued Dodd-Frank financial reforms have made it easier for regulators to shut down troubled institutions, questioned the study’s validity.
“That’s one study Senator, you don’t know if that’s an accurate number.”
Here’s more of the rather heated exchange:
Bernanke: “The subsidy is coming because of market expectations that the government would bail out these firms if they failed. Those expectations are incorrect. We have an orderly liquidation authority. Even in a crisis, we, in the cases of AIG for example, we wiped out the shareholders…”
Warren: “Excuse me, though, Mr. Chairman, you did not wipe out the shareholders of the largest financial institutions, did you, the big banks?