Treasury rejects notion of too big to fail

“So, to the extent the largest financial companies have been benefiting from a funding advantage based on their ratings, that uplift has been declining and appears to be continuing to go away as implementation of DFA progresses,” Miller said.

She also said that other evidence also points to “potential market recognition of progress on financial regulatory reform implementation.”

Miller said that, “If investors still perceived large bank holding companies as too big to fail, we would expect to see low credit default swap spreads with little variation between the largest companies.

“However, compared to their pre-crisis baseline, the credit default swap spreads for the largest bank holding companies have not only increased on an absolute basis but investors have also increasingly distinguished between the largest bank holding companies as measured by the variance in their spreads,” she said.

Miller also said that “another interesting wrinkle” to this issue is that credit default swap spreads for these companies have recently been declining.

Miller said that her comments demonstrate “above all else that the evidence on both sides of the argument is mixed and complicated, making it hard to attribute the existence or absence of a funding cost advantage to any single factor, including a market perception of a too big to fail subsidy.”

The bottom line, Miller said, “is simply that it is important to acknowledge the difficulty of making these assessments and to be cautious about drawing conclusions in either direction.

“We will continue to carefully consider the developments and the work in this area, remaining mindful that our financial system is dynamic and that we need to remain vigilant to evolving risks,” she said.

Miller said Treasury and other regulators “must continue to work hard to reduce the risks posed by large financial companies and keep putting in place the measures to wind such companies down with minimal impact on the rest of the economy if the need arises.”

She said that to the extent the largest bank holding companies enjoy any funding cost advantage based on a perceived too big to fail status, ”these efforts should help wring it the rest of the way out of the market. 

“And most importantly, this work is making our financial system safer and a stronger, more reliable engine for providing credit to help our economy grow,” Miller said.

“This is a more accurate analysis than what we usually see, but it still doesn’t quite get to the issue of what makes someone too big to fai,” noted L. Charles Landgraf, a partner and insurance regulatory expert at Arnold & Porter LLP in Washington.

“Rather,” said Landgraf, “it talks sensibly about misapprehensions regarding the meaning of that term and then about how the financial system will now be somewhat better regulated. Still, the nature of systemic risk is not discussed, nor is the nature of the companies that might be named SIFIs.”

See also:

• MetLife CEO rejects SIFI
• Fed issues final rule for nonbank supervision
• Debate over fed, state, international rules intensifies
• FSOC in final stages of SIFI evaluations