Tags: baker | obama | banks

Baker: Obama Policy Hurts Small Banks

Thursday, 05 Nov 2009 08:27 AM

By Julie Crawshaw

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Once the Obama administration makes the "too big to fail"(TBTF) doctrine official policy, small banks will have to pay a lot more for the funds they borrow, says economist Dean Baker.

“Data from the FDIC on the cost of funds suggests that this may be exactly what happened in the last year,” Baker writes for The Center or Economic Policy Research. Baker is co-director of the center in Washington, DC.

In the period from the fourth quarter of 2008 through the second quarter of 2009, after the government bailouts had largely established “too big to fail” as official policy, the gap had widened from 0.29 to an average of 0.78 percentage points, Baker points out.

“If the extraordinary gap between the cost of funds at smaller banks and TBTF banks persists for several more quarters and remains in place even as interest rates return to more normal levels, it would imply that the taxpayers are in fact giving a substantial subsidy to these large banks as a result of the TBTF policy,” he says.

In a clear break with U.S. economic policy, the British government will dismantle at least three “too big to fail” large financial institutions owned in part by the government, the BBC reports.

Chancellor Alistair Darling said that Lloyds, RBS, and Northern Rock will be broken up and parts sold to new entrants to the banking sector, possibly creating three new UK banks over the next three to four years as a result.

However, Darling said he would only sell parts of the banks when "the time is right," to ensure taxpayers get their money back.

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