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Goldman Says, What Too Big to Fail Advantage?

Stocks in this article: BAC C JPM GS WFC

NEW YORK ( TheStreet) -- Goldman Sachs has published a paper that debunks the idea that the biggest banks get an unfair funding advantage because they are considered "too big to fail"

The firm's public policy research unit, the Global Markets Institute, said in a May report titled "Measuring the TBTF effect on bond pricing" that recent studies overstate the funding advantages of so-called Too Big to Fail Banks.

According to the researchers' findings, the big banks enjoyed a slight funding advantage of about 6 basis points on an average between 1999 and 2007, which widened sharply during the crisis but has now reversed to a "disadvantage."

Bonds of the biggest six banks -- JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS) and Morgan Stanley (MS) actually trade at a 10 basis point disadvantage to the bonds of other banks, according to the research report.

Their findings strike at the heart of the debate surrounding the country's biggest banks. Several studies published recently have found that the biggest banks get a "taxpayer driven funding advantage" over smaller banks, because the market believes the government will not risk harm to the financial system by allowing these large banks to fail.

The belief that some banks are too big to fail is dangerous as it could once again lead to reckless risk taking, as some players may believe that the losses will always be "socialized." It is a notion that regulators and policymakers want to get rid of and has prompted serious calls to break up the big banks.

But those studies have tended "to analyze an overly broad universe of bond issuers, including non-bank financials and non-US firms from a wide range of countries," the Goldman Sachs researchers wrote. The broader universe had the effect of inflating the advantage of the largest banks, according to Goldman.

While some studies have said the advantage might be as much as 80 basis points, Goldman Sachs researchers say the advantage since 1999 has averaged 31 basis points.

Moreover, the other studies ignored the fact that the biggest firms in most industries, not just banking, have a funding advantage over smaller ones. In fact the advantage in other industries was even greater than that observed in banking, according to Goldman.

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