Implicit Guarantee Subsidy
Since the full amount of the deposits and debts of "too big to fail" banks are effectively guaranteed by the government, large depositors view deposits with these banks as a safer investment than deposits with smaller banks. Therefore, large banks are able to pay lower interest rates to depositors than small banks are obliged to pay.
In October 2009, Sheila Bair, at that time the Chairperson of the FDIC, commented:
- "'Too big to fail' has become worse. It's become explicit when it was implicit before. It creates competitive disparities between large and small institutions, because everybody knows small institutions can fail. So it's more expensive for them to raise capital and secure funding."
Research has shown that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being too big to fail.
Read more about this topic: Too Big To Fail
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