A major focus of the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was to end the belief by the public that there were some banks considered “too big to fail” — that is the concept that the U.S. government would provide assistance to avoid having one of the country’s largest banks fail because of the perceived systemic risk such a failure would pose to the country’s financial system. A recent Government Accountability Office (GAO) study revealed that even with the progress that has been made due to many of the reforms in Dodd-Frank, some market participants still feel that there is a likelihood (albeit reduced) that the U.S. government would step in to prevent the failure of a large U.S. bank holding company.
The GAO analyzed the relationship between a bank holding company’s size and its funding costs, taking into account other factors that could affect funding costs such as controlling for credit risk, and generally found that the largest U.S. bank holding companies had lower funding costs during the financial crisis of 2007-2009 than smaller financial institutions, at a time when the U.S. government was engaged in various levels of government support to financial institutions in order to avert a systemic melt down of the financial system. The GAO also found that since then this difference in funding costs apparently has declined, and cited several regulatory reforms that may have contributed to this decline, such as the new orderly liquidation authority whereby the Federal Deposit Insurance Corporation would facilitate the orderly resolution of a large bank holding company, enhanced risk-based capital and liquidity requirements, leverage limits, stress testing, and a prohibition on proprietary trading (the so-called “Volcker Rule”).
