New analysis from the Federal Reserve Bank of New York casts doubt on the idea that regulators have ended the perception that big banks would get rescued by the government in a crisis.
The New York Fed's research is the latest entry in a number of studies that have sought to answer whether big banks remain "too big to fail" in the wake of the 2010 Dodd-Frank financial reform law that created new regulatory powers meant to prevent future bailouts.
"[T]he evidence suggests that rating agencies and market participants may have some doubts about the ability, so far, of the Dodd-Frank Act to deal with 'too big to fail,' " New York Fed researchers Gara Afonso and João Santos wrote in a post published by the regional Fed bank Wednesday.
The economists addressed the question in two ways. First, they surveyed ratings agencies' perceptions of whether the government would be forced to support banks in an emergency. The results are mixed: Fitch says no, Moody's says maybe, and Standard & Poor's says yes.
Second, they examined investors' expectations, as reflected in the prices of the banks' bonds.
Because the Federal Deposit Insurance Corporation has outlined a strategy to safely shut down failing banks by taking them over at the holding company level, investors should have priced holding company bonds and insurance as more risky than similar instruments for subsidiaries of the holding company. The New York Fed's analysis of the bond prices for banks such as Wells Fargo and JPMorgan Chase, however, suggests that they have not.
The analysts caution that those results might change as more features of Dodd-Frank are phased in, concluding that "time will tell."
Lawmakers and academics have fought over the question of whether big banks are too big to fail, and whether they correspondingly are able to raise money more cheaply from investors.
The New York Fed researchers' latest analysis conflicts with a paper published by the Federal Reserve Board of Governors in the spring, which found that big banks no longer receive a funding advantage through the perception that they would be bailed out.
A much-anticipated Government Accountability Office study released last summer found mostly ambiguous results on the same question.