| The basis of this article is a May 2012 IMF Working Paper called "Quantifying Structural Subsidy Values for Systematically Important Financial Institutions" (http://www.imf.org/external/pubs/ft/wp/2012/wp12128.pdf). The subsidy discussed is not an issue of economics directly, but capital markets, i.e. finance. The paper infers a subsidy level for state-supported financial institutions by comparing the level of state support embedded in credit agency ratings and comparing them to their long-run average value. The authors control for the factors such as the sovereign's own ability to support, because sovereign debt is also rated by agencies, and for institutions intrinsic rating values. Credit ratings are used directly and indirectly by capital market participants to determine the level of funding costs across all debt markets. So, they are the best available proxy for determining at least a floor for this preferential rate. As can be seen from previous financial crises, actual bailouts would be highly dependent on the nature of crises and may be substantially higher than expected. How do those particular banks get that subsidy? - from other market participants. In a sense, governments are permitting the misallocation of capital from other market participants, including governments and government agencies (hence taxpayers are directly involved), into the state-supported institutions. It is not a zero-sum game because of how that capital is then used. Why not charge all banks the same rate and let the size of these banks eat themselves. - there is no central rate allocation. Market participants use market prices and their best available information for funding costs. A state-supported institution is naturally considered by many participants to be a lower risk than a non-state supported institution. |