General Discussion
In reply to the discussion: Study: Mega bank JP Morgan Chase receives a $14 billion annual subsidy from the US government [View all]Jim Lane
(11,175 posts)Using your example of a fixed 0.5% markup, you write: "If the bank borrows at 3.5%, it lends at 4%. If the bank borrows at 4%, it lends at 4.5%, and so on."
But if market conditions would allow the bank to lend out the full amount available at 4.5%, then if instead it's lending at only 4% (because the government has lowered the bank's borrowing costs), then the demand for loans would exceed the supply. In other words, some would-be borrowers who refused to pay 4.5% will be willing to pay 4%. In that instance, the bank won't woodenly keep lending at 4% until the money runs out, and then tell other loan applicants that the window is closed. No, the bank will instead calculate what rate (4.1%? 4.375%?) it can charge and still lend out all the money it wants to lend. It will happily up its markup from 0.5% to 0.6% or whatever, thereby increasing its profits.
I'll concede that there's probably some truth to your analysis to this extent: Because the government implicitly subsidizes more than one giganto-bank, it does affect the market conditions. When Citibank assesses the credit market, it's assessing a credit market in which Chase, Bank of America, etc. are also beneficiaries of this too-big-to-fail policy, which affects their lending decisions, thus in turn affecting what Citibank can charge. As a result, it's probably not a dollar-for-dollar effect. I don't know whether the authors of the quoted study considered this complication. If they didn't, their numbers may be on the high side. Nevertheless, that would only dampen the subsidization effect, not eliminate it.
In addition, the prospect of a bailout amounts to government aid to big banks as opposed to their smaller (mostly regional) competitors, which are less likely to be deemed too big to fail.