LARGE BANK 

HOLDING 

COMPANIES

Expectations of 

Government Support

Report to Congressional Requesters

July 2014

GAO-14-621

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-621, a report to 

congressional requesters

July 2014

LARGE BANK HOLDING COMPANIES

Expectations of Government Support

Why GAO Did This Study

In its comments, the Department of the 

Treasury generally agreed with GAO’s 

analysis. GAO incorporated technical 

comments from the financial 

regulators, as appropriate.

What GAO Found

While views varied among market participants with whom GAO spoke, many 

believed that recent regulatory reforms have reduced but not eliminated the 

likelihood the federal government would prevent the failure of one of the largest 

bank holding companies. Recent reforms provide regulators with new authority to 

resolve a large failing bank holding company in an orderly process and require 

the largest bank holding companies to meet stricter capital and other standards, 

increasing costs and reducing risks for these firms. In response to reforms, two of 

three major rating agencies reduced or removed the assumed government 

support they incorporated into some large bank holding companies’ overall credit 

ratings. Credit rating agencies and large investors cited the new Orderly 

Liquidation Authority as a key factor influencing their views. While several large 

investors viewed the resolution process as credible, others cited potential 

challenges, such as the risk that multiple failures of large firms could destabilize 

markets. Remaining market expectations of government support can benefit 

large bank holding companies if they affect investors’ and customers’ decisions. 

GAO analyzed the relationship between a bank holding company’s size and its 

funding costs, taking into account a broad set of other factors that can influence 

funding costs. To inform this analysis and to understand the breadth of 

methodological approaches and results, GAO reviewed selected studies that 

estimated funding cost differences between large and small financial institutions 

that could be associated with the perception that some institutions are too big to 

fail. Studies GAO reviewed generally found that the largest financial institutions 

had lower funding costs during the 2007-2009 financial crisis but that the 

difference between the funding costs of the largest and smaller institutions has 

since declined. However, these empirical analyses contain a number of 

limitations that could reduce their validity or applicability to U.S. bank holding 

companies. For example, some studies used credit ratings which provide only an 

indirect measure of funding costs.

GAO’s analysis, which addresses some limitations of these studies, suggests 

that large bank holding companies had lower funding costs than smaller ones

during the financial crisis but provides mixed evidence of such advantages in 

recent years. However, most models suggest that such advantages may have 

declined or reversed. GAO developed a series of statistical models that estimate 

the relationship between bank holding companies’ bond funding costs and their 

size or systemic importance, controlling for other drivers of bond funding costs, 

such as bank holding company credit risk. Key features of GAO’s approach 

include the following:

• U.S. Bank Holding Companies: The models focused on U.S. bank holding 

companies to better understand the relationship between funding costs and 

size in the context of the U.S. economic and regulatory environment.

• Bond Funding Costs: The models used bond yield spreads—the difference 

between the yield or rate of return on a bond and the yield on a Treasury 

bond of comparable maturity—to measure funding costs because they are a 

risk-sensitive measure of what investors charge bank holding companies to 

borrow.

View GAO-14-621. For more information, 

contact Lawrance Evans, Jr. at (202) 512-

4802, or EvansL@gao.gov.

“Too big to fail” is a market notion that 

the federal government would 

intervene to prevent the failure of a 

large, complex financial institution to 

avoid destabilizing the financial sector 

and the economy. Expectations of 

government rescues can distort 

investor incentives to properly price the 

risks of firms they view as too big to 

fail, potentially giving rise to funding 

and other advantages for these firms. 

GAO was asked to review the benefits 

that the largest bank holding 

companies (those with more than $500 

billion in assets) have received from 

perceived government support. This is 

the second of two GAO reports on

government support for bank holding 

companies. The first study focused on 

actual government support during the

2007-2009 financial crisis and recent 

statutory and regulatory changes 

related to government support for 

these firms. This report examines how 

financial reforms have altered market 

expectations of government rescues 

and the existence or size of funding 

advantages the largest bank holding 

companies may have received due to 

perceived government support. 

GAO reviewed relevant statutes and 

rules and interviewed regulators, rating 

agencies, investment firms, and 

corporate customers of banks. GAO 

also reviewed relevant studies and 

interviewed authors of these studies. 

Finally, GAO conducted quantitative 

analyses to assess potential “too-bigto-fail” funding cost advantages. 
Highlights of GAO-14-621 (Continued)

United States Government Accountability Office

• Extensive Controls: The models controlled for credit 

risk, bond liquidity, and other variables to account for 

factors other than size that could affect funding costs.

• Multiple Models: GAO used 42 models for each year 

from 2006 through 2013 to assess the impact of using 

alternative measures of credit risk, bond liquidity, and 

size and to allow the relationship between size and 

bond funding costs to vary over time with changes in 

the economic and regulatory environment.

• Credit Risk Levels: GAO compared bond funding 

costs for bank holding companies of different sizes at 

the average level of credit risk for each year, at low 

and high levels of credit risk for each year, and at the 

average level of credit risk during the financial crisis.

The figure below shows the differences between modelestimated bond funding costs for bank holding companies 

with $1 trillion in assets and bank holding companies with 

$10 billion in assets, with average levels of credit risk in

each year. Circles represent statistically significant modelestimated differences.

Estimates from 42 Models of Average Bond Funding Cost Differences between Bank Holding Companies with $1 Trillion and 

$10 Billion in Assets, 2006-2013

Notes: GAO estimated econometric models of the relationship between BHC size and funding costs using data for U.S. BHCs and their outstanding 

senior unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used bond yield spreads to measure funding costs 

and controlled for credit risk factors such as capital adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and BHCs that can affect funding costs. GAO estimated 42 models for each year from 2006 through 2013 to assess the 

sensitivity of estimated funding cost differences to using alternative measures of capital adequacy, volatility, bond liquidity, and size or systemic 

importance. GAO used the models to compare bond funding costs for BHCs of different sizes but the same levels of credit risk, bond liquidity, and other

characteristics. This figure compares bond funding costs for BHCs with $1 trillion and $10 billion in assets, for each model and for each year, with 

average levels of credit risk. Each circle and dash shows the comparison for a different model, where circles and dashes below zero suggest BHCs with 

$1 trillion in assets have lower bond funding costs than BHCs with $10 billion in assets, and vice versa. 

All 42 models found that larger bank holding companies 

had lower bond funding costs than smaller ones in 2008 

and 2009, while more than half of the models found that 

larger bank holding companies had higher bond funding 

costs than smaller ones in 2011 through 2013, given the 

average level of credit risk each year (see figure). 

However, the models’ comparisons of bond funding costs 

for bank holding companies of different sizes varied 

depending on the level of credit risk. For example, in 

hypothetical scenarios where levels of credit risk in every 

year from 2010 to 2013 are assumed to be as high as 

they were during the financial crisis, GAO’s analysis 

suggests that large bank holding companies might have 

had lower funding costs than smaller ones in recent years. 

However, reforms in the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, such as enhanced 

standards for capital and liquidity, could enhance the 

stability of the financial system and make such a credit risk 

scenario less likely.

This analysis builds on certain aspects of prior studies, but 

important limitations remain and these results should be 

interpreted with caution. GAO’s estimates of differences in 

funding costs reflect a combination of several factors, 

including investors’ beliefs about the likelihood a bank 

holding company will fail and the likelihood it will be rescued 

by the government if it fails, and cannot precisely identify 

the influence of each factor. In addition, these estimates 

may reflect factors other than investors’ beliefs about the 

likelihood of government support and may also reflect 

differences in the characteristics of bank holding companies 

that do and do not issue bonds. Finally, GAO’s estimates, 

like all past estimates, are not indicative of future trends.
Page i GAO-14-621 Large Bank Holding Companies 

Letter 1

Scope and Methodology 2

Background 11

Reforms Have Reduced Expectations of Government Support 

among Key Market Observers and Increased Regulation for 

Large Institutions 24

Evidence Suggests Large Banks Had a Funding Cost Advantage 

over Small Ones during the Financial Crisis That May Have 

Declined or Reversed Since 40

Agency Comments and Our Evaluation 58

Appendix I. Methodology for Analysis of Funding Cost Differences between 

Large and Small Bank Holding Companies 63

Appendix II Comments from the Department of the Treasury 84

Appendix III GAO Contact and Staff Acknowledgments 86

Tables

Table 1: Overview of Variables Used in Econometric Models 8

Table 2: Empirical Studies of Too-Big-to-Fail Funding Cost 

Differences 41

Table 3: Numbers of Bank Holding Companies and Bonds, 2006-

2013 65

Table 4: Summary Statistics for Bank Holding Companies and 

Bonds Analyzed, 2008 and 2013 69

Table 5: Parameter Estimates for Baseline Regressions, 2008 and 

2013 72

Table 6: Baseline Comparisons of Bond Yield Spreads for Bank 

Holding Companies of Different Sizes by Year, 2008 and 

2013 (basis points) 77

Table 7: Comparisons of Bond Yield Spreads for Bank Holding 

Companies with $1 trillion versus $10 billion in Assets, All 

42 Models, 2008 and 2013 (basis points) 79

Contents
Page ii GAO-14-621 Large Bank Holding Companies 

Figures

Figure 1: Estimates from 42 Models of Average Bond Funding 

Cost Differences between Bank Holding Companies with 

$1 Trillion and $10 Billion in Assets, 2006-2013 50

Figure 2: Difference in Estimated Bond Funding Costs for Average 

Credit Risk Bank Holding Companies with $1 Trillion 

versus $10 Billion in Assets by Indicator of Size or 

Systemic Importance, 2013 52

Figure 3: Difference in Estimated Bond Funding Costs for Bank 

Holding Companies with $1 Trillion versus $10 Billion in 

Assets by Level of Credit Risk, 2013 55

Figure 4: Difference in Estimated Bond Funding Costs for Average 

Credit Risk Bank Holding Companies with $1 Trillion 

versus $10 Billion in Assets by Model Specification, by 

Year, 2006-2013 82

Abbreviations

AIG American International Group, Inc.

BHC bank holding company

CCAR Comprehensive Capital Analysis and Review

FDIC Federal Deposit Insurance Corporation

FDICIA FDIC Improvement Act of 1991

FSOC Financial Stability Oversight Council

GSIB global systemically important bank

IDI insured depository institution

LTCM Long-Term Capital Management

OCC Office of the Comptroller of the Currency

OFR Office of Financial Research

OLA Orderly Liquidation Authority

S&P Standard & Poor’s

SIFI systemically important financial institution

SPOE Single Point-of-Entry

TARP Troubled Asset Relief Program

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Page 1 GAO-14-621 Large Bank Holding Companies 

441 G St. N.W.

Washington, DC 20548

July 31, 2014

The Honorable Sherrod Brown

Chairman

Subcommittee on Financial Institutions and Consumer Protection 

Committee on Banking, Housing, and Urban Affairs

United States Senate

The Honorable David Vitter

United States Senate

“Too big to fail” refers to a market notion that the federal government 

would intervene to prevent the failure of a large, interconnected financial 

institution to avoid harm to the economy. Events during the 2007-2009 

financial crisis heightened concerns that market participants had come to 

view several of the largest U.S. financial institutions as too big to fail. 

Most notably, the U.S. government intervened to provide tens of billions 

of dollars of capital and other support to a few large troubled financial 

institutions out of concern that allowing these firms to go into bankruptcy 

would have further disrupted troubled credit markets and damaged 

confidence in the U.S. financial system.1

 1

Bankruptcy is a federal court procedure conducted under rules and requirements of the 

U.S. Bankruptcy Code. The goal of bankruptcy is to give individuals and businesses a 

“fresh start” from burdensome debts by eliminating or restructuring debts they cannot 

repay and helping creditors receive some payment in an equitable manner through 

liquidation or reorganization of the debtor.

Market expectations of 

government rescues can distort the incentives of investors and 

counterparties to properly price and restrain the risks of firms they believe 

to be too big to fail, potentially giving rise to funding cost and other 

advantages for these firms relative to smaller competitors. For example, 

creditors may be willing to accept lower interest rates on debt issued by 

these firms if they believe the possibility of a government rescue reduces 

the likelihood that they could suffer losses. If creditors and other 

counterparties do not fully charge a firm for the risks it is taking, that firm 

may have incentives to take on greater risks in the pursuit of higher 

returns. Excessive risk-taking in response to such incentives can increase 

the likelihood that such a firm could become distressed and disrupt 

financial markets.
Page 2 GAO-14-621 Large Bank Holding Companies 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (DoddFrank Act) prohibits rescues of individual failing financial institutions and 

provides new tools and authorities for the Federal Deposit Insurance 

Corporation (FDIC) to resolve a large failing financial institution in a 

manner that imposes losses on the firm’s creditors and other investors 

while minimizing adverse impacts to the economy.2

You asked us to review any economic benefits that the largest bank 

holding companies (those with more than $500 billion in total consolidated 

assets) have received as a result of actual or perceived government 

support. This is the second of two reports we are issuing on this topic.

Nevertheless, market 

observers have continued to debate whether some of the largest and 

most complex financial institutions may continue to benefit from beliefs 

among their investors and counterparties that the government might 

intervene to prevent their failure.

3

To address our first objective, we reviewed information from relevant 

statutory provisions and regulations and prior GAO reports to describe 

financial reforms that could impact market expectations of government 

rescues or relative advantages or disadvantages of being a large bank 

In 

this report, we review (1) what is known about how financial reforms have 

altered market expectations of government rescues and the relative 

advantages or disadvantages of being a large bank holding company and 

(2) the extent to which the largest bank holding companies have received 

funding cost advantages as a result of perceptions that the government 

would not allow them to fail.

 2

Pub. L. No. 111-203, 124 Stat. 1376 (2010).

3

In November 2013, we issued the first report, which examined (1) actual government 

support for banks and bank holding companies during the financial crisis and (2) recent 

statutory and regulatory changes related to government support for banks and bank 

holding companies. See GAO, Government Support for Bank Holding Companies: 

Statutory Changes to Limit Future Support Are Not Yet Fully Implemented, GAO-14-18 

(Washington, D.C.: Nov. 14, 2013). At a January 2014 hearing, we provided testimony 

based on this report. See GAO, Government Support for Bank Holding Companies: 

Statutory Changes to Limit Future Support Are Not Yet Fully Implemented, GAO-14-174T 

(Washington, D.C.: Jan. 8, 2014). 

Scope and 

Methodology
Page 3 GAO-14-621 Large Bank Holding Companies 

holding company.4

We conducted interviews with representatives from 10 investment firms 

and six corporations to learn about (1) factors that influence their 

decisions to invest in or do business with bank holding companies of 

various sizes; (2) how they assess the risks of banks and the extent to 

which they rely on credit rating agencies’ assessments of these risks; (3) 

their views on the likelihood that the federal government would intervene 

to prevent the failure of a large bank holding company and factors that 

have influenced these views over time; and (4) how, if at all, expectations 

of government support have impacted their decisions to invest in or do 

business with banks of various sizes. In selecting investment firms and 

large corporations for interviews, we selected nonrepresentative samples 

of firms. As a result, the views we present from these firms are not 

generalizable to the broader community of bank investors and customers 

and do not indicate which views are most prevalent. We selected 

investment firms with experience investing in debt or equity securities of 

banks and bank holding companies and selected different types of 

investment firms to obtain perspectives reflecting a range of investing 

strategies. Specifically, we selected three large asset management firms 

(each with more than $1 trillion in assets under management); three 

public pension funds (each with more than $50 billion in assets under 

management); three hedge funds; and one large insurance company. We 

We obtained perspectives on the potential impacts of

these reforms from credit rating agencies, investment firms, and 

corporations that are customers of banks. Where available and relevant, 

we reviewed some public statements, reports, and other analyses by 

these groups. For example, to obtain information about credit rating 

agencies’ assessments of the likelihood and level of government support 

for large bank holding companies, we reviewed relevant publications by 

the three largest credit rating agencies: Fitch Ratings (Fitch), Moody’s 

Investors Service (Moody’s), and Standard & Poor’s (S&P). We 

interviewed representatives from each of these rating agencies to obtain 

their perspectives on factors contributing to changes in their assessments 

of government support over time.

 4

For example, we reviewed GAO-14-18, which describes Dodd-Frank Act provisions 

intended to place limits on agency authorities to provide emergency assistance to financial 

firms and strengthen regulatory oversight of large bank holding companies. We also 

reviewed prior GAO work on potential impacts of the Dodd-Frank Act. See GAO, Financial 

Regulatory Reform: Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act, 

GAO-13-180 (Washington, D.C.: Jan. 16, 2013). 
Page 4 GAO-14-621 Large Bank Holding Companies 

selected U.S. corporations from different industry sectors and with a 

range of banking needs. We identified four of these firms and contacted 

them with the assistance of the U.S. Chamber of Commerce, which 

reached out to its members on our behalf, and selected two additional 

firms to achieve additional diversity across industry sectors. The 

corporations we interviewed included four multinational corporations (a 

chemical company, a delivery and logistics company, an energy 

company, and a technology company) and two corporations with all or 

close to all of their operations in the United States (a regional electric 

utility company and a national retail services company).

To obtain additional information and perspectives on how financial 

reforms or credit ratings could impact the relative advantages or 

disadvantages of being a large bank holding company, we reviewed 

relevant publicly available information in the financial statements of bank 

holding companies and conducted interviews with bank holding 

companies of various sizes, bank industry associations, public interest 

groups, academics, and other experts. For example, we reviewed bank 

holding companies’ financial disclosures about how Dodd-Frank reforms 

could increase certain fees and how a credit rating downgrade could 

impact the amount of collateral required of them under certain financial 

contracts. We also reviewed our prior work on potential impacts of DoddFrank Act implementation.5

As part of our first objective, we reviewed regulators’ efforts to assess 

their progress in addressing too-big-to-fail perceptions and market 

distortions that can result. We reviewed Dodd-Frank Act provisions that 

outline statutory responsibilities for the Financial Stability Oversight 

Council (FSOC) and reviewed relevant sections of the FSOC annual 

report. We interviewed officials from FSOC, the Department of the 

Treasury (Treasury), the Board of Governors of the Federal Reserve 

System (Federal Reserve Board), FDIC, and the Office of the Comptroller 

of the Currency (OCC) about their efforts to analyze the impacts of DoddFrank reforms on too-big-to-fail perceptions and to evaluate whether 

additional policy actions may be needed to address any remaining market 

distortions. We also reviewed relevant congressional testimonies and 

other public statements by agency officials.

 5

See GAO-13-180. 
Page 5 GAO-14-621 Large Bank Holding Companies 

To assess the extent to which the largest bank holding companies have 

received funding cost advantages as a result of perceptions that the 

government would not allow them to fail, we conducted an econometric 

analysis of the relationship between a bank holding company’s size and 

its funding costs. To inform our econometric approach and understand 

the breadth of results and methodological approaches, we reviewed 

studies that estimated the funding cost difference between large and 

small financial institutions that could be associated with the perception 

that some institutions are too big to fail. We evaluated studies that met 

the following criteria: (1) used a comparative empirical approach that 

attempted to account for differences across financial institutions that 

could influence funding costs, (2) included U.S. bank holding companies, 

and (3) included analysis of data from 2002 or later. We chose these 

criteria to identify the most relevant and rigorous studies related to our 

research objective. To identify studies that met these criteria, we sought

input from individuals, agencies, and groups that we interviewed, 

identified studies cited in an initial set of studies we had already identified, 

and conducted a systematic search of research databases (including 

Google Scholar and SSRN).

Our criteria excluded studies that used option-pricing approaches—that 

is, techniques that use tools for pricing stock options to estimate the value 

associated with possible government interventions to assist distressed 

banks—because these studies assume a too-big-to-fail funding cost 

advantage exists and only estimate its magnitude. We also excluded two 

studies that otherwise met our criteria, but did not attempt to control for 

important differences between financial institutions. We were aware of 

potential conflicts of interest associated with a number of studies in our 

review. For example, one study was conducted by researchers at a large 

bank holding company and two others were sponsored by a trade group 

representing large commercial banks. We considered the potential impact 

these conflicts of interest might have on their methods and results. We 

ultimately included 16 studies in our review that we determined were 

sufficiently reliable for the purposes of this report.

In reviewing these studies, we assessed what they identified as the level 

of funding cost differences and how that level has changed over time and 

we identified the strengths and limitations of the studies’ approaches.

Because of limitations of the methodologies of these studies, their results, 

while suggestive of general trends, are not definitive and thus should be 

interpreted with caution. We interviewed authors of selected studies, 

federal financial regulators, and other experts to obtain perspectives on 
Page 6 GAO-14-621 Large Bank Holding Companies 

the strengths and limitations of relevant quantitative approaches that have 

been used.

Taking into consideration the strengths and limitations of different 

methodologies, we developed our own econometric approach to evaluate 

the extent to which the largest bank holding companies may have 

received funding cost advantages as a result of perceptions that the 

government would not allow them to fail. In addition, we selected three 

experts with relevant expertise to review our econometric approach and 

assess its strengths and limitations. These experts reviewed our 

approach before we implemented it and provided comments on our 

methodology. In many instances, we made changes or additions to our 

models to address their comments, and in other instances, we disclosed 

additional limitations of the models. Before selecting these experts, we 

reviewed potential sources of conflicts of interest, and we determined that 

the experts we selected did not have any material conflicts of interest for 

the purpose of reviewing our work.

We used a multivariate regression model to estimate the relationship 

between bank holding companies’ funding costs and their size while 

controlling for factors other than size that may also influence funding 

costs. Our general regression model is the following:

In this model, b denotes the bank holding company, q denotes the 

quarter, funding costbq is the bank holding company’s cost of funding in 

a quarter, sizebq is a measure of the bank holding company’s size at the 

beginning of the quarter, credit riskbq is a list of proxies for the bank 

holding company’s credit risk—the risk that the bank holding company will 

not repay the funds it borrowed as agreed, Xbq is a list of other variables 

that may influence funding costs, εbq is an idiosyncratic error term, and 

α, β, γ, δ, and Θ are parameters to be estimated. The parameter β

captures the direct relationship between a bank holding company’s 

funding cost and its size. The parameter δ captures the indirect 

relationship between a bank holding company’s funding cost and its size 

that exists if the size of a bank holding company affects the relationship 

between its funding cost and credit risk. If investors view larger bank 
Page 7 GAO-14-621 Large Bank Holding Companies 

holding companies as less risky than smaller bank holding companies 

due to beliefs that the government is more likely to rescue larger bank 

holding companies in distress, then either β is less than zero, δ is less 

than zero, or both.6

We used a measure of funding costs based on bonds issued by bank 

holding companies. Bank holding companies use a variety of funding 

types from different sources, including various types of deposits, bonds, 

and equity. We used bond yield spreads—the difference between the

yield on a bond and the yield on a Treasury bond of comparable 

maturity—to measure a bank holding company’s cost of bond funding. 

Treasury securities are widely viewed as a risk-free asset, so the yield 

spread measures the price that investors charge a bank holding company 

to borrow to compensate them for credit risk and other factors. We 

focused on bond yield spreads because they are a measure of funding 

costs that is available for bank holding companies of a range of sizes, 

including bank holding companies with less than $10 billion in assets. 

Furthermore, bonds are traded in secondary markets, so changes in bond 

yield spreads can be publicly observed in a timely manner. Finally, bond 

yield spreads are a direct measure of funding costs, unlike alternatives 

such as credit ratings.

However, the parameters β and δ may also reflect 

factors other than these beliefs.

We used Bloomberg to identify U.S. bank holding companies with more 

than $500 million in assets that were operating in 1 or more years from 

2006 through 2013, and to identify all plain vanilla, fixed-rate, senior 

unsecured bonds issued by these bank holding companies, excluding 

bonds with an explicit government guarantee.7

 6

Negative values of βand δ are consistent with these beliefs as long as greater values of 

the size measure are associated with larger bank holding companies and greater values 

of the credit risk proxies are associated with greater credit risk.

We collected data on bond 

yield spreads, bank holding company size, variables associated with bank 

holding company credit risk, and bond characteristics from Bloomberg. 

We used these data to assemble a dataset with one observation for each 

bond in each quarter from the first quarter of 2006 through the fourth 

quarter of 2013. We constructed alternative measures to control for size, 

bond liquidity, and credit risk due to uncertainty about how to 

7

Plain vanilla bonds refer to bonds that pay interest at regular intervals and return the 

principal at maturity with no additional features such as convertibility to stock or options to 

redeem the bond before maturity. Such bonds are also known as straight bonds.
Page 8 GAO-14-621 Large Bank Holding Companies 

appropriately capture these important factors influencing bond yields and 

because the regression results may be sensitive to alternative 

specifications (see table 1). The numbers of bank holding companies and 

bonds we analyzed and summary statistics for our indicators of size, 

credit risk, and other factors are in appendix I.

Table 1: Overview of Variables Used in Econometric Models

Funding costs Size Credit riska Other bond and bank holding company characteristics

Quarterly average bond 

yield spreads based on 

prices from executed trades, 

executable quotes, and 

composites derived from 

executable and indicative 

quotes.b

Quarterly average bond 

yield spreads based on 

executed trades only.

Total assets.

Total assets and total assets 

squared.

An indicator for whether or not 

a bank holding company had 

$50 billion or more in assets.c

An indicator for whether or not 

a bank holding company was 

designated a globally 

systemically important bank in 

November 2013.

Capital adequacy: Equity capital 

and subordinated debt as 

percentages of assets and riskweighted assets.d

Asset quality: Nonperforming 

assets as a percentage of

tangible common equity plus 

loan loss reserves.e

Earnings: Net income as a 

percentage of assets.

Maturity mismatch: Volatile 

liabilities minus liquid assets as a 

percentage of total liabilities.

f

Volatility: Standard deviation of 

equity prices over the quarter, 

option-implied volatility for the 

quarter, the standard deviation of 

equity returns over the quarter, 

the standard deviation of excess 

equity returns over the quarter, 

and the standard deviation of 

earnings.

g

Bond liquidity: Issue size, total 

volume traded during a quarter, 

and average bid-ask spread over 

a quarter.h

Coupon rate: The current 

interest rate on the bond.

Time to maturity: The number of 

quarters until the bond matures.

Operating expenses: Noninterest 

expense as a percentage of total 

assets.

Source: GAO. | GAO-14-621

Note: Unless otherwise noted, all balance sheet and income statement variables—such as assets, 

liabilities, and net income—are measured as of the beginning of the quarter.

a

Credit risk increases with higher values of our asset quality, maturity mismatch, and volatility 

measures and with lower values of our capital adequacy and earnings measures.

b

Bond yield spreads are the difference between the yield on a bond and the yield on a comparable 

Treasury bond. Executed trades are completed transactions for which the terms have been agreed 

upon and assets have been exchanged. Executable quotes (or firm quotes) are prices quoted by 

dealers at which they would be willing to trade. Indicative quotes are prices quoted by dealers that 

give an indication of the price at which a bond might trade but at which they are not obligated to trade. 

Composite quotes or prices are derived from quantitative algorithms that aggregate information on 

prices from executed trades, executable quotes, and indicative quotes to give an indication of the 

market price of a bond.

c

The Dodd-Frank Act requires bank holding companies with $50 billion or more in total assets to be 

subjected to enhanced regulatory standards and supervision. Pub. L. No. 111-203, § 165, 124 Stat. 

1376, 1423 (2010) (codified at 12 U.S.C. § 5365).

d

Regulators generally require that banks maintain certain ratios of capital as a share of assets to 

ensure that they have sufficient capital to absorb losses. Under the Basel approaches, banks may 
Page 9 GAO-14-621 Large Bank Holding Companies 

weight certain assets based on their risks, and use these risk-weighted assets to calculate their 

capital adequacy ratios.

e

Nonperforming assets include assets in nonaccrual status, other real estate owned, restructured 

loans, and restructured loans in compliance. Tangible common equity is total capital minus perpetual 

preferred stock minus goodwill and other intangibles.

f

Volatile liabilities include federal funds purchased and repurchase agreements, trading liabilities, 

other borrowed funds, foreign deposits, and jumbo deposits less derivatives with negative fair value. 

Liquid assets include cash, securities, federal funds sold and reverse repurchase agreements, and 

trading assets less pledged securities.

g

Option-implied volatility is a measure of a security’s expected volatility as reflected by the market 

price of traded options on that security. The theoretical price of an option is a function of the 

underlying price, strike price, historical volatility of the underlying, the risk-free rate, and the time to 

expiration. Implied volatility is calculated by using the market price of the option and solving for 

volatility. Excess return is a security’s return minus the return from a no-risk security during the same 

time period.

h

The bid-ask spread is the difference between the best buying price and the best selling price.

We developed a variety of econometric models that use alternative 

measures of bond liquidity, bank holding company credit risk, and the size 

or systemic importance of a bank holding company. We estimated the 

parameters for each of our models separately for each year from 2006 

through 2013 to allow the relationship between bank holding company 

size and bond funding costs to vary over time.8

 8

We estimated the parameters of our models using the least squares estimator, which is a 

standard statistical and econometric technique that calculates the values of the 

parameters of our regression model that minimize the sum of the squared errors—the 

differences between bond funding costs observed in the data and bond funding costs 

predicted by the model.

Our baseline models used 

average yield spreads on senior unsecured bonds based on actual 

trades, executable quotes, and composites derived from executable and 

indicative quotes to measure bond funding costs; total assets to measure 

size; equity capital and subordinated debt as percentages of total assets 

to measure capital adequacy; and issue size and total volume to measure 

bond liquidity. We estimated the baseline model for each year and for 

each of our five measures of volatility, as well as for each year without a 

measure of volatility. We also estimated models that added average bidask spread to our baseline indicators of bond liquidity, models that used 

average yield spreads based only on actual trades, models that used 

equity capital and subordinated debt as percentages of risk-weighted 

assets as our indicators of capital adequacy, models that used global 

systemically important bank (GSIB) designation as an indicator of size, 

models that used the $50 billion asset threshold as an indicator of size, 

and models that used both total assets and the square of total assets as 
Page 10 GAO-14-621 Large Bank Holding Companies 

indicators of size.9

We used our models to compare bond funding costs for bank holding 

companies of different sizes, all else being equal.

Altogether, we used 42 separate models for each year 

from 2006 through 2013. For all models, we included indicators for each 

quarter to control for the influence on yield spreads of economic 

conditions, the regulatory environment, and other factors that vary over 

time but not across bank holding companies. The details of the models 

we estimated and the results for our baseline models for select years are 

in appendix I.

10

Our approach is limited by several factors. Investors’ beliefs about the 

likelihood of government support are composed of several different 

elements, including the likelihood that a bank holding company will fail, 

the likelihood that it will be rescued by the government if it fails, and the 

Because our models 

account for the possibility that investors’ beliefs about government 

rescues depend on the credit risk level of the bank holding company, we 

made comparisons for bank holding companies with the average level of 

credit risk that prevailed each year. In addition, we assessed the impact 

of credit risk on our comparisons by making comparisons at credit risk 

levels higher and lower than the average for each year and also while 

holding the level of credit risk constant over time at the average level for 

2008—the year when the financial crisis peaked and credit risk for bank 

holding companies was high. By holding credit risk constant, we can 

assess the extent to which changes in average credit risk over time may 

have influenced changes in funding costs relative to other factors.

 9

The Dodd-Frank Act requires bank holding companies with $50 billion or more in total 

assets to be subjected to enhanced regulatory standards and supervision. Pub. L. No. 

111-203, § 165, 124 Stat. 1376, 1423 (2010) (codified at 12 U.S.C. § 5365). In addition, 

the Financial Stability Board designated 29 GSIBs, including eight U.S. bank holding 

companies, for the purpose of identifying firms that should be subject to resolution 

planning requirements and heightened regulatory supervision. The GSIBs generally 

comprise the largest and most complex internationally active financial firms. The bid-ask 

spread is the difference between the best buying price and the best selling price. 

10Our models allow the size of a bank holding company to influence its bond funding costs 

directly and also indirectly through the interactions between size and the credit risk 

variables. As a result, no single parameter is sufficient to describe the relationship 

between bond funding costs and size. To summarize the overall relationship between 

bond funding costs and size reflected in each specification, we calculated bond funding 

costs for bank holding companies of different sizes and credit risk levels using our 

estimates of the parameters for each specification for each year. See appendix I for more 

details on the calculations.
Page 11 GAO-14-621 Large Bank Holding Companies 

size of the losses that the government may impose on investors if it 

rescues the bank holding company, but our methodology—like the 

methodologies used by other researchers—does not allow us to precisely 

identify the influence of each of these components. Although we have 

taken into account many factors that may influence bond yield spreads 

and that differ for bank holding companies of different sizes, our 

estimates of differences in bond yield spreads for bank holding 

companies of different sizes may reflect factors other than investors’ 

beliefs about the likelihood of government support because our control 

variables are imperfect or may be incomplete. In addition, our estimates 

of differences in bond yield spreads for bank holding companies of 

different sizes may reflect differences in the characteristics of bank 

holding companies that choose to issue bonds. The section of this report 

that addresses our second objective contains a fuller discussion of the 

limitations associated with our empirical work.

For parts of our work that involved the analysis of computer-processed 

data, such as market data used in our analysis of funding cost 

differences, we assessed the reliability of these data by reviewing 

relevant documentation and conducting interviews with data providers to 

review steps they took to collect and ensure the reliability of the data. In 

addition, we electronically tested data fields for missing values, outliers, 

and obvious errors. We determined that these data were sufficiently 

reliable for our purposes.

We conducted this performance audit from January 2013 to July 2014 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

While the 2007-2009 financial crisis highlighted concerns about the 

market distortions that can result from too-big-to-fail perceptions, concern 

about such distortions pre-dated the crisis. A key factor giving rise to the 

too-big-to-fail dilemma has been the emergence of financial institutions of 

such size, interconnectedness, and market importance that their failure 

could threaten to severely disrupt the financial system and damage the 

economy. Although the federal government’s policy responses to failing 

financial institutions in recent decades have not formed a clear pattern in 

terms of the availability or structure of government support, these 

Background
Page 12 GAO-14-621 Large Bank Holding Companies 

responses may have influenced market views on the likelihood of 

government support. Several observers trace too-big-to-fail concerns 

back to 1984 when FDIC provided support to Continental Illinois National 

Bank, then the sixth largest U.S. bank in terms of total assets, to prevent 

its failure and losses to its depositors and creditors.11 The Federal 

Reserve Board’s response to the near failure of a large U.S. hedge fund, 

Long-Term Capital Management (LTCM), in 1998 was another significant 

event that may have contributed to too-big-to-fail perceptions.12

During the 2007-2009 crisis, the federal government took actions to 

stabilize the financial system by creating new emergency programs with 

broad-based eligibility and providing firm-specific assistance to prevent 

the failures of large financial institutions.

While 

LTCM was not itself a large bank, the Federal Reserve Board’s 

intervention in helping to facilitate private-sector assistance to LTCM may 

have signaled the willingness of federal government authorities to 

intervene to avoid potential systemic consequences from a large, 

interconnected financial firm’s failure. Other factors may have contributed 

to some ambiguity surrounding the likely recipients and circumstances of 

government support in the years leading up to the 2007-2009 financial 

crisis. For example, failures and near-failures of large financial firms had 

been infrequent and occurred under varying circumstances, making it 

difficult to discern a clear pattern of government support.

13

 11For more information about the government rescue of Continental Illinois National Bank, 

see GAO, Financial Markets and Institutions: Views on the Federal Rescue of the 

Continental Illinois National Bank and Trust Co, Testimony by the Comptroller General of 

the U.S. before the Subcommittee on Financial Institutions Supervision, Regulation, and 

Insurance of the Committee on Banking, Finance and Urban Affairs of the U.S. House of 

Representatives (Washington, D.C.: Dec. 14, 1984); and GAO, Financial Crisis 

Management: Four Financial Crises in the 1980s, 

Notably, however, U.S. 

government authorities’ initial responses to impending failures of large 

financial institutions did not send a clear signal about the availability of 

government support. In March 2008, the Federal Reserve Board 

authorized emergency assistance to prevent the failure of one large 

GAO/GGD-97-96 (Washington, D.C.: 

May 1, 1997).

12For more information on the near-collapse of Long-Term Capital Management and 

broader issues it raised, see GAO, Long-Term Capital Management: Regulators Need to 

Focus Greater Attention on Systemic Risk, GAO/GGD-00-3 (Washington, D.C.: Oct. 29, 

1999). 

13For more discussion of the federal government’s emergency actions to assist the 

financial sector, see GAO-14-18.
Page 13 GAO-14-621 Large Bank Holding Companies 

investment bank (Bear Stearns Companies, Inc.), but 6 months later, 

Federal Reserve Board officials determined that they could not assist 

another large failing investment bank, Lehman Brothers Holdings, Inc. 

(Lehman Brothers).14 Following Lehman Brothers’ bankruptcy 

announcement on September 15, 2008, which triggered an intensification 

of the financial crisis, U.S. government authorities took actions that 

signaled a stronger near-term commitment to prevent the failure of 

systemically important financial institutions. On the day after Lehman 

Brothers’ bankruptcy announcement, the Federal Reserve Board 

authorized up to $85 billion of credit assistance for American International 

Group, Inc. (AIG) to prevent its failure.15

 14At the time, Bear Stearns was one of the largest investment banks. For further 

discussion of this assistance, see GAO, Federal Reserve System: Opportunities Exist to 

Strengthen Policies and Processes for Managing Emergency Assistance, 

In addition, on September 29, 

2008, the Secretary of the Treasury invoked the systemic risk exception 

for the first time since the enactment of the FDIC Improvement Act of 

1991(FDICIA) to authorize FDIC to provide assistance to avert the failure 

of Wachovia Corporation—then the fourth-largest banking organization in 

GAO-11-696 

(Washington, D.C.: July 21, 2011). During the weekend of September 13-15, 2008, 

government officials met with leaders of major financial firms to devise a private-sector 

solution to Lehman Brothers’ likelihood of defaulting on its obligations, but they were 

unable to find a solution. While the Federal Reserve Board was able to provide liquidity to 

Lehman Brothers against collateral through its emergency credit programs, according to 

the Federal Reserve Board Chairman at that time, neither the Federal Reserve Board nor 

any other agency had the authority to provide the capital or unsecured guarantee of its 

obligations that they believed Lehman Brothers needed to avert failure. See Ben S. 

Bernanke, Board of Governors of the Federal Reserve System, “Lessons from the Failure 

of Lehman Brothers” (testimony before the Committee on Financial Services, U.S. House 

of Representatives, Washington, D.C., Apr. 20, 2010).

15Subsequent to the announcement of the $85 billion credit assistance, Treasury and the 

Federal Reserve provided new forms of assistance and restructured the assistance 

package for AIG over time. For more information about the federal government’s 

assistance to AIG, see GAO, Troubled Asset Relief Program: Status of Government 

Assistance Provided to AIG, GAO-09-975 (Washington, D.C.: Sept. 21, 2009).
Page 14 GAO-14-621 Large Bank Holding Companies 

terms of assets in the United States—by facilitating Citigroup Inc.’s 

acquisition of its banking operations.16

At the height of the crisis in late 2008, the United States and other G7 

countries announced an agreement to implement a comprehensive action 

plan to provide liquidity to financial markets and prevent the failure of any 

systemically important institution, among other objectives.17 That month, 

U.S. government agencies launched two of the largest U.S. emergency 

initiatives: the Troubled Asset Relief Program, through which Treasury 

provided capital and other assistance to eligible financial institutions, and 

the Temporary Liquidity Guarantee Program, through which FDIC 

guaranteed certain uninsured deposits and newly issued unsecured debt 

of eligible financial institutions.18

 16A few days after the announcement of the proposed Citigroup acquisition, Wachovia 

announced that it would instead merge with Wells Fargo in a transaction that would 

include all of Wachovia’s operations and require no FDIC assistance. As a result, the 

FDIC loss-sharing agreement on Wachovia assets was not implemented. FDICIA included 

a systemic risk exception to the requirement that FDIC resolve failed banks using the least 

costly method. Pub. L. No. 102-242, § 141, 105 Stat. 2236, 2275 (codified at 12 U.S.C. § 

1823(c)(4)(G)). Under this exception, FDIC could provide assistance to a failing bank if 

compliance with its requirements to resolve the bank using the least costly approach 

would have “serious adverse effects on economic conditions or financial stability”—that is, 

would cause systemic risk—and if such assistance would “avoid or mitigate such adverse 

effects.” Id. FDIC could act under the exception only under a process that included 

recommendations from the FDIC Board of Directors and Federal Reserve Board and 

approval by the Secretary of the Treasury. The Dodd-Frank Act restricts FDIC’s authority 

to provide open bank assistance to an individual failing bank outside of receivership and 

replaces it with a new authority, subject to certain restrictions and a joint resolution of 

congressional approval, to create a debt-guarantee program with broad-based eligibility. 

Pub. L. No. 111-203, § 1105(a), 124 Stat. 1376, 2121 (2010) (codified at 12 U.S.C. §§ 

5612(a) and 5613(b)).

In late 2008 and early 2009, Treasury, 

the Federal Reserve Board, and FDIC authorized packages of firmspecific assistance for two of the largest U.S. bank holding companies, 

Citigroup Inc. and Bank of America Corporation. Foreign governments 

launched parallel initiatives to provide broad-based liquidity support and 

17The G7 is an informal forum of coordination among Canada, France, Germany, Italy, 

Japan, the United Kingdom, and the United States.

18For more about the Troubled Asset Relief Program, see GAO, Troubled Asset Relief 

Program: One Year Later, Actions Are Needed to Address Remaining Transparency and 

Accountability Challenges, GAO-10-16 (Washington, D.C.: Oct. 8, 2009). For more about 

the Temporary Liquidity Guarantee Program, see GAO, Federal Deposit Insurance Act: 

Regulators’ Use of Systemic Risk Exception Raises Moral Hazard Concerns and 

Opportunities Exist to Clarify the Provision, GAO-10-100 (Washington, D.C.: Apr. 15, 

2010).
Page 15 GAO-14-621 Large Bank Holding Companies 

also took steps to prevent the failures of large financial institutions. 

Examples of large foreign financial institutions that received firm-specific 

assistance from their governments include Royal Bank of Scotland Group 

PLC (United Kingdom) and UBS (Switzerland).

Since the onset of the financial crisis, the largest banks have grown 

bigger in many major advanced economies, even as the financial sector 

has shrunk, and U.S. and foreign policymakers have acknowledged that 

crisis policy interventions raised moral hazard concerns.19 As discussed 

earlier, market perceptions that some firms are too big to fail can distort 

market participants’ incentives to properly price and restrain risk-taking by 

these firms. U.S. regulators have coordinated with foreign counterparts 

through the G20 and the Financial Stability Board to develop a policy 

framework for addressing the risks posed by large, complex financial 

institutions.20 In November 2010, G20 leaders endorsed the Financial 

Stability Board’s framework for addressing too-big-to-fail concerns. The 

framework aims to reduce the probability and impact of the failure of 

systemically important firms.21 Key elements of this framework include 

developing effective resolution regimes and strengthening capital 

standards for systemically important financial institutions. FDIC, the 

Federal Reserve Bank of New York, and Treasury helped to develop 

standards the Financial Stability Board issued for effective resolution 

regimes in October 2011.22

 19The share of total bank assets held by the five largest global banks has increased in 

many advanced countries and highlights concerns about too big to fail.

In addition, U.S. banking regulators have 

worked with their foreign counterparts to develop a strengthened capital 

regime that will require global systemically important banks to have 

20The G20, established in 1999, is a forum for international cooperation on important 

issues of the global economic and financial agenda. Its members include 19 countries and 

the European Union. The G20 leaders established the Financial Stability Board as the 

successor to the Financial Stability Forum and made it responsible for coordinating and 

promoting the implementation of the G20 reform commitments.

21Financial Stability Board, “Reducing the Moral Hazard Posed by Systemically Important 

Financial Institutions – FSB Recommendations and Time Lines,” October 20, 2010. In 

September 2013, the Financial Stability Board issued a report providing an update on 

progress in implementing this framework. See Financial Stability Board, “Progress and 

Next Steps Towards Ending ‘Too-Big-to-Fail’ (TBTF) – Report of the Financial Stability 

Board to the G20,” September 2, 2013.

22Financial Stability Board, “Key Attributes of Effective Resolution Regimes for Financial 

Institutions,” October 2011. 
Page 16 GAO-14-621 Large Bank Holding Companies 

additional loss absorbing capacity.23

U.S. federal financial regulators have made progress in implementing 

Dodd-Frank Act provisions and related reforms to restrict future 

government support and reduce the likelihood and impacts of the failure 

of a systemically important financial institution (SIFI).

U.S. federal financial regulators are 

implementing these and other elements of the Financial Stability Board’s 

framework for addressing too big to fail as part of the process of 

implementing relevant Dodd-Frank Act provisions.

24

Restrictions on Emergency Authorities. The Dodd-Frank Act revised 

Federal Reserve Board and FDIC emergency authorities so that 

emergency assistance can no longer be provided to assist a single and 

specific firm but rather can only be made available through a program 

with broad-based eligibility—that is, a program that provides funding 

support to institutions that meet program requirements and that choose to 

participate.

These reforms can 

be grouped into four general categories: (1) restrictions on regulators’ 

emergency authorities to provide assistance to financial institutions; (2) 

new tools and authorities for regulators to resolve a failing SIFI outside of 

bankruptcy if its failure would have serious adverse effects on the U.S. 

financial system; (3) enhanced regulatory standards for SIFIs related to 

capital, liquidity, and risk management; and (4) other reforms intended to 

reduce the potential disruptions to the financial system that could result 

from a SIFI’s failure.

25

New Tools and Authorities for Resolving SIFIs. The Dodd-Frank Act 

includes two key reforms intended to facilitate the orderly resolution of a 

 23For more information about the U.S. role in international financial reform efforts, 

including the development of international financial standards, see GAO, International 

Financial Reforms: U.S. and Other Jurisdictions’ Efforts to Develop and Implement 

Reforms, GAO-14-261 (Washington, D.C.: Apr. 3, 2014).

24While the Dodd-Frank Act does not use the term “systemically important financial 

institution,” this term is commonly used by academics and other experts to refer to bank 

holding companies with $50 billion or more in total consolidated assets and nonbank 

financial companies designated by FSOC for Federal Reserve supervision and enhanced 

prudential standards.

25Pub. L. No. 111-203, §§ 1101 and 1105, 124 Stat. 1376, 2113 and 2121 (2010) (codified 

at 12 U.S.C. §§ 343(3)(A) and 5612). For more information about changes to these 

authorities, see GAO-14-18. 

Dodd-Frank Act Provisions
Page 17 GAO-14-621 Large Bank Holding Companies 

large failing firm without a taxpayer-funded rescue: (1) requirements for 

SIFIs to formulate and submit to regulators resolution plans (or “living 

wills”) that detail how the companies could be resolved in bankruptcy in 

the event of material financial distress or failure; and (2) the Orderly 

Liquidation Authority (OLA), through which FDIC can resolve large 

financial firms, and which provides an alternative to bankruptcy if 

resolution under the bankruptcy code would have serious adverse effects 

on financial stability.26

• Living wills. Title I of the Dodd-Frank Act requires bank holding 

companies with $50 billion or more in consolidated assets and 

nonbank financial companies designated by FSOC to formulate and 

submit to FDIC, the Federal Reserve Board, and FSOC resolution 

plans (or “living wills”) that detail how the companies could be 

resolved in bankruptcy in the event of material financial distress or 

failure.27 The Federal Reserve Board and FDIC have finalized rules 

relating to resolution plans, and the large bank holding companies that 

were the first firms required to prepare and submit such plans 

submitted these to regulators as expected in July 2012.28 Regulators 

reviewed these initial plans and developed guidance on what 

information should be included in 2013 resolution plan submissions.29

 26§ 165(d), 124 Stat. at 1426 (codified at 12 U.S.C. § 5365(d)); § 204, 124 Stat. at 1454-

56 (codified at 12 U.S.C. § 5384). During the financial crisis, several large financial 

institutions became insolvent and filed for bankruptcy when no private-sector solution was 

found. For example, Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 

2008. Lehman had $639 billion in total assets and $613 billion in total liabilities as of May 

31, 2008. The bankruptcy proceedings highlighted inconsistencies in laws and regulations 

across countries and limitations on the ability of countries to coordinate effectively during 

the reorganization or liquidation of international financial institutions. 

If FDIC and the Federal Reserve Board jointly determine that a 

resolution plan is not credible or would not facilitate an orderly 

resolution of the company under the bankruptcy code, after giving the 

company an opportunity to remedy the plan’s deficiencies, the 

27§ 165(d)(1), 124 Stat. at 1426 (codified at 12 U.S.C. § 5365(d)(1)).

28Resolution Plans Required, 76 Fed. Reg. 67323 (Nov. 1, 2011). 

29In October 2013, the Federal Reserve Board and FDIC released the public sections of 

filed annual resolution plans for 11 firms. “Federal Reserve Board and FDIC, Agencies 

Release Public Sections of the Second Submission of Resolution Plans for 11 

Institutions,” accessed on November 7, 2013, 

http://www.federalreserve.gov/newsevents/press/bcreg/20131003a.htm. 
Page 18 GAO-14-621 Large Bank Holding Companies 

agencies may jointly decide to impose more stringent regulatory 

requirements on the company.30

• Orderly Liquidation Authority. OLA gives FDIC the authority, subject to 

certain constraints, to resolve large financial firms, including 

nonbanks, outside of the bankruptcy process.31 This authority allows 

for FDIC to be appointed receiver for a financial firm if the Secretary of 

the Treasury determines, among other things, that the firm’s failure 

and its resolution under applicable federal or state law, including 

bankruptcy, would have serious adverse effects on U.S. financial 

stability and no viable private-sector alternative is available to prevent 

the default of the financial company.32 While the Dodd-Frank Act does 

not specify how FDIC must exercise this authority, FDIC is developing 

an approach to resolving a firm under OLA that it refers to as the 

Single Point-of-Entry (SPOE) approach. 

Under the SPOE approach, FDIC would be appointed receiver of the 

top-tier U.S. parent holding company of a financial group determined 

to be in default or in danger of default following the completion of the 

appointment process set forth under the Dodd-Frank Act. Immediately 

after placing the parent holding company into receivership, FDIC 

would transfer assets (primarily the equity and investments in 

subsidiaries) from the receivership estate to a bridge financial holding 

company. By allowing FDIC to take control of the firm at the holding 

 30§ 165(d)(4)-(5), 124 Stat. at 1426-27 (codified at 12 U.S.C. § 5365(d)(4)-(5)). Further, if, 

after 2 years following the imposition of the more stringent standards, the resolution plan 

still does not meet the statutory standards, FDIC and the Federal Reserve Board may, in 

consultation with FSOC, direct a company to divest certain assets or operations. Id.

31§ 204, 124 Stat. at 1454-1456 (codified at 12 U.S.C. § 5384).

32§ 204(b), 124 Stat. at 1455 (codified at 12 U.S.C. § 5384(b)). The factors to be 

considered by the Secretary of the Treasury are set forth in Section 203(b) of the DoddFrank Act. § 203(b), 124 Stat. at 1451 (codified at 12 U.S.C. § 5383(b)). Before the 

Secretary of the Treasury, in consultation with the President, makes a decision to seek the 

appointment of FDIC as receiver of a financial company, at least two-thirds of those 

serving on the Board of Governors of the Federal Reserve System and at least two-thirds 

of those serving on the Board of Directors of FDIC must vote to make a written 

recommendation to the Secretary of the Treasury to appoint FDIC as receiver. 

§203(a)(1)(A), 124 Stat. at 1450 (codified at 12 U.S.C. § 5383(a)(1)(A)). In the case of a 

broker-dealer, the recommendation must come from the Federal Reserve Board and the 

Securities and Exchange Commission, in consultation with FDIC, and in the case of an 

insurance company, from the Federal Reserve Board and the Director of the Federal 

Insurance Office, in consultation with FDIC. § 203(a)(1)(B)-(C), 124 Stat. at 1450 (codified 

at 12 U.S.C. § 5383(a)(1)(B)-(C)).
Page 19 GAO-14-621 Large Bank Holding Companies 

company level, this approach is intended to allow subsidiaries 

(domestic and foreign) carrying out critical services to remain open 

and operating. In a SPOE resolution, at the parent holding company 

level, shareholders would be wiped out, and unsecured debt holders 

would have their claims written down to reflect any losses that 

shareholders cannot cover. Under the Dodd-Frank Act, officers and 

directors responsible for the failure cannot be retained.33

The new resolution authority under the Dodd-Frank Act provides a 

back-up source for liquidity support, the Orderly Liquidation Fund, 

which could provide liquidity support to the bridge financial company if 

customary sources of liquidity are unavailable.34 The law requires 

FDIC to recover any losses arising from a resolution by collecting 

assessments from bank holding companies with $50 billion or more in 

consolidated assets, nonbank financial holding companies designated 

for supervision by the Federal Reserve Board, and other financial 

companies with $50 billion or more in consolidated assets.35

Enhanced Regulatory Standards. The Dodd-Frank Act also introduced a 

number of regulatory changes designed to reduce the risks that the 

largest financial institutions pose to the financial system. The act requires 

the Federal Reserve Board to create enhanced capital and prudential 

standards for SIFIs.36

• Risk-based capital requirements and leverage limits. The act required 

the Federal Reserve Board to establish capital and leverage 

standards, which, as finalized, include a requirement for covered firms 

to develop capital plans to help ensure that they maintain capital 

According to Federal Reserve Board officials, in 

implementing these reforms, the Federal Reserve Board aims to design 

prudential standards that will both reduce the likelihood of a covered 

institution’s failure and create incentives for these institutions to reduce 

their systemic footprint. The act’s provisions related to enhanced 

prudential standards for these covered firms include, but are not limited 

to, the following:

 33§ 204(a)(2), 124 Stat. at 1454 (codified at 12 U.S.C. § 5384(a)(2)). 

34§ 210(n), 124 Stat. at 1506 (codified at 12 U.S.C. § 5390(n)).

35§ 210(o)(1), 124 Stat. at 1509 (codified at 12 U.S.C. § 5390(o)(1)). 

36§165(a)(1), 124 Stat. at 1423 (codified at 12 U.S.C. § 5365(a)(1)).
Page 20 GAO-14-621 Large Bank Holding Companies 

ratios above specified standards, under both normal and adverse 

conditions.37 In addition, the Federal Reserve Board has announced 

its intention to apply capital surcharges to some or all firms based on 

the risks these firms pose to the financial system.38

• Liquidity requirements. The act required the Federal Reserve Board to 

establish liquidity standards, which as finalized include requirements 

for covered firms to hold liquid assets that can be used to cover their

cash outflows over short periods and in stressed conditions.39 In 

addition, the Federal Reserve Board, FDIC, and OCC have issued a 

proposed rule that would implement a minimum liquidity requirement

that is consistent with the Basel III liquidity coverage ratio and would 

apply to internationally active U.S. banking organizations and U.S. 

depository institutions with $250 billion or more in total consolidated 

assets.40

• Risk management requirements. Publicly traded covered firms must 

establish a risk committee and be subject to enhanced risk 

management standards.41

• Stress testing requirements. The Federal Reserve Board is required 

to conduct an annual evaluation of whether covered firms have 

 37§165(b)(1)(A)(i), 124 Stat. at 1424; Enhanced Prudential Standards for Bank Holding 

Companies and Foreign Banking Organizations; Final Rule, 79 Fed. Reg. 17240 (Mar. 27, 

2014) (codified at 12 C.F.R. pt. 252).

38The Federal Reserve Board plans to issue a proposal to impose graduated common 

equity risk-based capital surcharges on U.S. bank holding companies designated as 

global systemically important banks (GSIB). The Federal Reserve Board has said this 

proposal will be based on the GSIB capital surcharge framework developed by the Basel 

Committee, under which the size of the surcharge for an individual GSIB would vary from 

1 percent to 2.5 percent, depending on the firm’s systemic importance. 

39§165(b)(1)(A)(ii), 124 Stat. at 1424 (codified at 12 U.S.C. § 5365(b)(1)(A)(ii)). Enhanced 

Prudential Standards for Bank Holding Companies and Foreign Banking Organizations; 

Final Rule, 79 Fed. Reg. 17240 (Mar. 27, 2014) (codified at 12 C.F.R. pt. 252).

40Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring; 

Proposed Rule, 78 Fed. Reg. 71818 (Nov. 29, 2013).The requirement is designed to 

promote the short-term resilience of the liquidity risk profile of internationally active 

banking organizations, thereby improving the banking sector’s ability to absorb shocks 

arising from financial and economic stress. Id.

41§§ 165(b)(1)(A)(iii) and 165(h), 124 Stat. at 1424 and 1429 (codified at 12 U.S.C. §§ 

5365(b)(1)(A)(iii) and 5365(h)).
Page 21 GAO-14-621 Large Bank Holding Companies 

sufficient capital to absorb losses that could arise from adverse 

economic conditions.42

The Federal Reserve Board has been implementing the enhanced 

standards required by the Dodd-Frank Act in conjunction with its 

implementation of Basel III, a set of risk-based capital, leverage, and 

liquidity standards developed by the Basel Committee on Banking 

Supervision.43 The Basel capital reforms include a risk-based capital 

surcharge that will apply to financial institutions that have been 

designated as GSIBs. Further, the U.S. banking agencies have already 

adopted a leverage capital surcharge that will apply to the eight U.S. 

banking organizations that are GSIBs.44

Other Reforms. The act includes other reforms that could help reduce the 

likelihood or impacts of a SIFI’s failure.

• Authorities related to SIFI size and complexity. The Dodd-Frank Act 

grants regulators new authorities to take certain actions if they 

determine that a SIFI poses risks of serious adverse effects on the 

stability of the financial system. These include the authority for the 

Federal Reserve Board to require a SIFI to meet even stricter 

 42§165(i)(1), 124 Stat. at 1430 (codified at 12 U.S.C. § 5365(i)(1)). Companies subject to 

enhanced prudential standards as well as regulated financial firms with more than $10 

billion in consolidated assets also must conduct their own semiannual or annual stress 

tests, respectively. § 165(i)(2), 124 Stat. at 1430-31 (codified at 12 U.S.C. § 5365(i)(2)).

43The Basel Committee has developed international standards for bank capital for its 

member economies since the 1980s. In recent years, U.S. federal banking regulators 

have worked with other members of the Basel Committee to strengthen the regulatory 

capital regime for internationally active banks and develop a framework for a risk-based 

capital surcharge for the world’s largest, most interconnected banking companies. The 

new regime, known as Basel III, seeks to improve the quality of regulatory capital and 

introduces a new minimum common equity requirement. Basel III also raises the 

numerical minimum capital requirements and introduces capital conservation and 

countercyclical buffers to require banking organizations to hold capital in excess of 

regulatory minimums. In addition, Basel III establishes for the first time an international 

leverage standard for internationally active banks. Federal banking regulators recently 

finalized capital reforms in the United States that are generally consistent with Basel III. 

The Federal Reserve Board will separately implement consistent capital and liquidity 

standards for nonbank financial companies designated for enhanced supervision by 

FSOC. 

44Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio 

Standards for Certain Bank Holding Companies and Their Subsidiary Insured Depository 

Institutions, 79 Fed. Reg. 24528 (May 1, 2014).
Page 22 GAO-14-621 Large Bank Holding Companies 

regulatory standards, the authority for the Federal Reserve Board to 

limit (with the approval of FSOC) the ability of a SIFI to merge with 

another company if it determines that the merger would pose a grave 

threat to U.S. financial stability, and, as noted above, the joint 

authority for the Federal Reserve Board and FDIC to require a firm to 

take steps to become more resolvable in bankruptcy.45

• Volcker rule. Section 619 of the Dodd-Frank Act (also known as the 

Volcker rule) generally prohibits proprietary trading by insured 

depository institutions and their affiliates and places restrictions on 

sponsorship or investment in hedge and private equity funds.46 The 

Volcker rule’s restrictions may have greater impacts on larger bank 

holding companies that have been more involved in the types of 

activities the rule restricts. To the extent that Volcker rule 

implementation prevents these large institutions from engaging in 

certain risky activities, it could serve to reduce the likelihood of their 

failure.

• Swaps clearing and margin requirements. Title VII of the Dodd-Frank 

Act establishes a new regulatory framework for swaps to reduce risk, 

increase transparency, and promote market integrity in swaps 

markets.47 As we previously reported, requirements for swaps to be 

cleared through clearinghouses can reduce the vulnerability of the 

financial system to the failure of one or a few of the major swap 

dealers by transferring credit risk from the swap counterparties to the 

clearinghouse.48

 45§ 121(a)(1), 124 Stat. at 1410 (codified at 12 U.S.C. § 5331(a)(1)); § 165(a)(1), 124 Stat. 

at 1423 (codified at 12 U.S.C. § 5365(a)(1)); § 165(d)(4)-(5), 124 Stat. at 1426-27 (codified 

at 12 U.S.C. § 5365(d)(4)-(5)). 

At the same time, experts have pointed out that 

clearinghouses concentrate credit risk and thus represent a potential 

46§ 619, 124 Stat. at 1620-31 (codified at 12 U.S.C. § 1851). Proprietary trading includes 

trading activities conducted by banking entities for their own account as opposed to those 

of their clients.

47A swap is a type of derivative that involves an ongoing exchange of one or more assets, 

liabilities, or payments for a specified period. Financial and nonfinancial firms use swaps 

and other over-the-counter derivatives to hedge risk, or speculate, or for other purposes. 

48See GAO-13-180. Counterparty credit risk is the risk to each party in an over-thecounter derivatives contract that the other party will not perform the contractual 

obligations. Technically, the clearing house members interact with the counterparties.
Page 23 GAO-14-621 Large Bank Holding Companies 

source of systemic risk.49 A benefit of the central clearing requirement 

is that clearinghouses require members to post margin for their trades 

and the Dodd-Frank Act also includes provisions that require 

regulators to develop margin requirements for uncleared swaps.50

Although federal financial regulators have finalized a number of rules 

related to these reforms, implementation of some key reforms has not yet 

been completed. For example, FDIC has largely completed the core 

rulemakings necessary to carry out its systemic resolution responsibilities,

and is continuing to develop its SPOE approach. FDIC requested public 

comments on its SPOE resolution strategy in December 2013, and the 

comment period closed in March 2014.

These new requirements could help reduce systemic risk by 

preventing the build-up of large, undercollateralized exposures.

51 In addition, regulators have not 

finalized certain rules that would subject SIFIs to enhanced prudential 

standards. For example, regulators have not finalized rules on singlecounterparty credit limits.52

 49FSOC has identified certain clearinghouses as systemically important financial market 

utilities, which are subject to risk management and other enhanced supervisory and 

prudential requirements under the Dodd-Frank Act and may be afforded access to 

collateralized emergency liquidity from Federal Reserve Banks in unusual or exigent 

circumstances.

50In May 2011, OCC, the Federal Reserve Board, FDIC, the Farm Credit Administration, 

and the Federal Housing Finance Agency issued a notice of proposed rule-making on 

margin and capital requirements for covered swap entities. Margin and Capital 

Requirements for Covered Swap Entities; Proposed Rule, 76 Fed. Reg. 27564 (May 11, 

2011).

51Resolution of Systemically Important Financial Institutions: The Single Point of Entry 

Strategy, 78 Fed. Reg. 243 (Dec. 18, 2013); Resolution of a Systemically Important 

Financial Institution: The Single Point of Entry Strategy, 79 Fed. Reg. 9899 (Feb. 21, 

2014). 

52In March 2014, the Basel Committee published a standardized approach to measuring 

counterparty credit risk exposures. This standardized approach will take effect starting on 

January 1, 2017. 
Page 24 GAO-14-621 Large Bank Holding Companies 

While views among investment firms we interviewed and credit rating 

agencies varied, many believe the Dodd-Frank Act has reduced but not 

eliminated the possibility of a government rescue of one of the largest 

bank holding companies. Two of the three largest credit rating agencies 

cited FDIC’s resolution process as a key factor in their decisions to 

reduce or eliminate “uplift”—an increase in the credit rating—they had 

assigned to the credit ratings of eight of the largest bank holding 

companies due to their assumptions of government support for these 

firms. Several representatives from large investment firms with whom we 

spoke told us that FDIC’s resolution process makes significant progress 

in reducing expectations of government support, but several agreed that 

uncertainty around its implementation or the circumstances of its use 

remains. As such, some market perceptions that the government might 

not allow the largest bank holding companies to fail remain and can give 

rise to advantages for these firms if these perceptions affect decisions by 

investors, counterparties, and customers of these firms. For example, 

credit rating agencies’ assignment of higher credit ratings due to assumed 

government support can create benefits for these firms, but because 

investors may rely on credit ratings to varying degrees, the impact of such 

benefits may vary accordingly. In addition, Dodd-Frank Act provisions and 

related rules subject the largest firms to higher fees and stricter regulation 

that may reduce their risk of failure and increase costs on them relative to 

smaller competitors. Officials from FSOC and some of its member 

agencies have stated that financial reforms have not completely removed 

too-big-to-fail perceptions, but have made significant progress toward 

doing so. They anticipate that remaining expectations of government 

support will decline as Dodd-Frank implementation progresses.

While views among credit rating agencies and investment firms varied, 

many believe the Dodd-Frank Act has reduced but not eliminated the 

possibility of a government rescue of one of the largest bank holding 

companies. During the financial crisis, credit rating agencies assigned or 

increased “uplift”—or an increase in the credit rating—for several large 

bank holding companies’ credit ratings to reflect their view that the 

increased possibility of government support for these firms reduced the 

risk that the firms’ creditors would suffer losses.53

 53For example, in December 2008, S&P introduced government support as a factor that 

could affect a financial institution’s ratings. Moody’s had assigned uplift in ratings for some 

bank holding companies before the financial crisis and during the crisis increased the 

amount of uplift for these firms and began to assign uplift to several other financial 

institutions. 

We reviewed changes 

Reforms Have 

Reduced 

Expectations of 

Government Support 

among Key Market 

Observers and 

Increased Regulation 

for Large Institutions

Some Credit Rating 

Agencies and Large 

Investors Believe DoddFrank Has Reduced the 

Likelihood of Government 

Rescues
Page 25 GAO-14-621 Large Bank Holding Companies 

in credit rating agencies’ assumptions about government support over 

time and interviewed credit rating agency representatives. Because large 

investors do not necessarily rely on credit ratings or rating agencies’

assessments of government support, we obtained perspectives from 

representatives of large asset management firms, pension funds, hedge 

funds, and other investment firms that purchase debt and equity issued 

by bank holding companies.54

Citing progress in Dodd-Frank implementation and other changes, two 

credit rating agencies have reduced or eliminated their rating uplift for the 

largest bank holding companies since the end of the 2007-2009 financial 

crisis, and a third rating agency has noted that regulatory developments 

may lead it to reduce or eliminate the uplift it assigns to these bank 

holding companies’ ratings. The three largest credit rating agencies—

Fitch, Moody’s, and S&P—have incorporated government support into 

their ratings over time, with the amount of increase in credit rating being 

driven by their assessment of the firm’s standalone credit rating—the 

credit rating that assumes no government support—and the impact on the 

firm’s creditworthiness they attribute to the likelihood of government 

support.55

 54As explained earlier in this report’s scope and methodology section, we selected 

nonrepresentative samples of investment firms for interviews. As a result, the views of 

investment firm representatives we interviewed are not generalizable to the broader 

universe of investors.

These three rating agencies have incorporated government 

support into their ratings using different approaches and under Fitch’s 

approach, assumptions of extraordinary government support have not led 

to an increase in rating for U.S. bank holding companies in all cases. 

Fitch incorporates government support into its ratings by assigning a 

“support rating floor,” a minimum credit rating that reflects its view about 

the likelihood an entity will receive company-specific government support 

in case of need, though the entity only receives “uplift” in its rating if its 

standalone credit rating is below the “support rating floor.” Following the 

July 2010 enactment of the Dodd-Frank Act, Fitch and Moody’s removed 

their assumptions of government support for several large regional bank 

holding companies and their subsidiary banks and reduced (but did not 

eliminate) their assumptions of support for eight of the largest U.S. bank 

55A firm with a lower standalone credit rating may receive a bigger increase in its rating 

from government support than a firm with a stronger standalone rating.
Page 26 GAO-14-621 Large Bank Holding Companies 

holding companies.56 Fitch and Moody’s reports cited FDIC’s new 

resolution authority and a reduced willingness by the U.S. government to 

assist a failing bank holding company as key factors influencing these 

changes in assumed government support. As of June 2014, S&P had not 

changed its level of assumed government support since the financial 

crisis.57 However, in June 2013, S&P noted that regulatory developments 

may lead it to reassess its assumptions of government support for the 

eight bank holding companies.58 The three credit rating agencies each 

noted that their remaining assumptions of government support reflected 

continued uncertainty about the ability of the U.S. government to 

effectively resolve one of the largest bank holding companies in OLA. In 

September 2013, Fitch indicated that it would conduct a global review of 

its support ratings and in March 2014, Fitch reported that it expects to 

remove its support rating floor for several of the largest U.S. bank holding 

companies within the next one or two years.59

 56These eight companies were Bank of America Corporation, Bank of New York Mellon, 

Citigroup Inc., Goldman Sachs Group, JPMorgan Chase & Co., Morgan Stanley, State 

Street Corporation, and Wells Fargo & Company. While Fitch continued to assign a 

support rating floor to eight bank holding companies, only 3 of these companies had 

standalone credit ratings below the support rating floor and thus received a higher credit 

rating from Fitch as a result of assumed government support. These three companies 

were Bank of America Corporation, Citigroup Inc., and Morgan Stanley. Following a March 

2014 upgrade to Citigroup Inc.’s rating, only Bank of America Corporation and Morgan 

Stanley continued to have a standalone rating below the support rating floor.

In November 2013, 

Moody’s removed all uplift from assumed government support from its 

57In a July 2013 report, S&P noted that regulatory developments may lead it to reassess 

its assumptions of extraordinary government support on the holding company ratings of 

the eight systemically important banks, but it was not considering removing such support 

assumptions at the subsidiary level. 

58Accordingly, S&P revised its rating outlook on the holding company of JPMorgan Chase 

& Co. to negative from stable, while maintaining negative rating outlooks on the holding 

companies of the other seven bank holding companies. S&P noted that it is monitoring 

FDIC’s progress in developing a resolution mechanism that aims to ensure that market 

confidence will not erode with the failure of a big bank and its resolution through Title II of 

Dodd-Frank. Furthermore, it indicated that it would consider the required level of long-term 

debt at the holding company as another factor in removing government support from those 

ratings.

59In March 2014, Fitch revised its outlook on Bank of America Corporation from “stable” to 

“negative,” reflecting its expectation that its assumption of weakening sovereign support is 

likely to result in a downgrade. Fitch also upgraded Citigroup Inc.’s standalone rating, after 

which only Bank of America Corporation and Morgan Stanley—which Fitch noted was 

likely to be upgraded—had standalone ratings below the support rating floor and thus 

benefitted from an uplift.
Page 27 GAO-14-621 Large Bank Holding Companies 

credit ratings for the remaining eight large bank holding companies.60

Representatives of large investment firms with whom we spoke said that 

they rely primarily on their own assessments of government support when 

investing in financial institutions, and they identified OLA and other 

reforms as factors influencing their views. While representatives of 

several firms said that Dodd-Frank reforms have significantly reduced or 

eliminated expectations of government rescues, others said they continue 

to expect that the government would rescue one of the largest bank 

holding companies under certain scenarios if policymakers judged the 

potential costs to the economy from such a failure to be too great.

Moody’s cited regulators’ substantial progress in establishing the SPOE 

receivership framework as a main consideration in their decision to 

remove the uplift. They noted that the SPOE framework would allow FDIC 

to impose losses on the creditors of a U.S. bank holding company to 

recapitalize and preserve the operations of the bank’s systemically 

important subsidiaries in a stress scenario. As a result, they believe that 

the holding company creditors of systemically important U.S. banks are 

unlikely to receive government support.

Investors generally cited progress on OLA and enhanced regulatory 

standards for the largest bank holding companies as among the most 

important factors influencing their views on the likelihood of government 

support, and many considered living wills and other reforms to be less 

significant factors.

 60While Moody’s removed rating uplift at the holding company level, it retained uplift in its 

ratings for the senior and subordinated debt of bank subsidiaries of these bank holding 

companies. Moody’s did not change its assignment of uplift for bank-level senior debt, 

explaining that it continued to believe that the disorderly failure of one of these large bank 

subsidiaries would create the risk of contagion to the broader financial system. In contrast, 

Moody’s reduced but did not eliminate uplift for subordinated debt of these banks’

subsidiaries. Moody’s attributed differences in its assessment of uplift for senior and 

subordinated debt to potential differences in the level of government support for senior 

and subordinated creditors. Moody’s noted that it expects support for bank-level creditors 

to come primarily from the protection provided by holding company creditors, who take 

losses before the bank-level creditors under the SPOE framework. However, if imposing 

losses on holding company creditors does not prove sufficient to ensure the viability of the 

bank subsidiary, Moody’s believes it is unlikely that bank-level subordinated creditors 

would receive direct government support. In contrast, in such a scenario, Moody’s 

believes senior creditors might still be supported by the government. 
Page 28 GAO-14-621 Large Bank Holding Companies 

FDIC’s resolution process. Investors with whom we spoke said that 

FDIC’s progress in developing its resolution process to implement OLA as 

an alternative to bankruptcy has caused them to significantly reduce their 

expectations of government support, but uncertainty around its 

implementation and circumstances of its use remains. Although several 

investors believed that FDIC’s resolution process is credible for managing 

a single large failure, two expressed doubts about whether it could be 

used to resolve multiple failing firms in a systemic crisis. They noted that 

if the economic costs of a large firm’s failure were judged to be too high, 

the federal government might not want to risk using OLA if regulators 

believed it would destabilize markets. Two investors noted that in the 

event that concerns about destabilizing markets led the federal 

government to provide emergency assistance to a failing firm in lieu of 

using OLA, policymakers might face political pressure to structure the 

assistance in a manner that imposed losses on creditors.61

Some investors identified areas where further progress is needed to 

enhance the credibility of OLA. First, some market observers have 

pointed to opportunities to further minimize the adverse market impacts 

that could result from resolving a firm under OLA. For example, although 

OLA provides for a 1-day stay on qualified financial contracts to allow for 

the selection of contracts to transfer to the bridge company, derivatives 

contracts written under the laws of other countries could allow 

counterparties to close out those contracts immediately, possibly posing 

liquidity issues for the firm and leading it to sell assets at depressed 

Other factors 

being equal, an investor’s belief that there is a possibility of incurring 

losses even if the government prevents a firm’s failure would reduce that 

investor’s willingness to provide funds to that firm on more favorable 

terms because of a too-big-to-fail perception. Because OLA is untested, 

some uncertainty may exist about its viability as an alternative to 

bankruptcy and government rescues until it is used.

 61While the Dodd-Frank Act contains provisions that prohibit rescues of individual failing 

institutions, a few investment firm representatives believed that, under certain scenarios,

the federal government might intervene to provide capital injections to distressed bank 

holding companies, which would require an act of Congress. These representatives said 

they did not know what form a government intervention would take, but indicated that 

elected officials could face pressure to intervene as the U.S. Congress did in October 

2008 when it passed legislation authorizing TARP. One representative of a large asset 

management firm said that while the political cost to elected officials of rescuing large 

financial institutions would be high, the costs to the economy of not intervening could also 

be high.
Page 29 GAO-14-621 Large Bank Holding Companies 

prices into the market. Some regulatory officials have said that crossborder agreements that create conformity in the treatment of derivatives 

contracts in resolution processes would enhance OLA’s effectiveness and 

practicality as a resolution tool. In addition, some investors noted that 

progress on the Federal Reserve’s planned proposal for a minimum longterm debt requirement could create greater certainty that the largest bank 

holding companies would have enough equity and debt to absorb losses 

and recapitalize their operating subsidiaries under OLA.62

Enhanced regulatory standards. Many investment firm representatives 

credited enhanced regulatory standards for the largest bank holding 

companies with improving the safety and soundness of these firms and 

reducing the likelihood that they would experience distress that could 

result in failure or government support. One representative from a large 

investment firm said that the best defense against banks needing 

government support is to make sure they are well-capitalized. Similarly, 

another investment firm representative said that higher capital ratios and 

strengthened balance sheets have given confidence to the markets that 

the institutions are more sound, in turn reducing the likelihood that they 

would fail and potentially receive government assistance. A 

representative from one large asset management firm said that enhanced 

capital and liquidity standards are a positive from a debt holder’s 

perspective because increased capital provides a bigger buffer to absorb 

losses and increased liquidity makes a run on the firm less likely.

Living wills. Several investors said the living wills may have positive 

effects, but some investors have expressed doubts about the 

effectiveness of the plans, with one investor citing a lack of public 

transparency. In a public comment letter to FDIC, The Credit Roundtable, 

a financial industry association, noted that additional living will disclosures 

would improve the market’s ability to gauge the level of risk under a 

SPOE scenario. Additionally, while the purpose of living wills is to make 

 62In his February 6, 2014, testimony to the Senate Banking Committee, Federal Reserve 

Governor Daniel Tarullo said that in the event that the equity of a financial firm is wiped 

out, successful resolution without taxpayer assistance would be most effectively 

accomplished if a firm has sufficient long-term, unsecured debt to absorb additional losses 

and to recapitalize the business transferred to a bridge operating company. In a public 

comment to FDIC on OLA’s single-point-of-entry framework, former FDIC Chair Sheila 

Bair identified the long-term debt requirement as a key component to ensure that a firm in 

OLA has sufficient loss-absorbing capacity.
Page 30 GAO-14-621 Large Bank Holding Companies 

SIFIs resolvable in bankruptcy, several large investors said they assume 

that a failing SIFI would be resolved through OLA.

Remaining market assumptions about government support can give rise 

to advantages for the largest bank holding companies in three broad 

categories to the extent these assumptions affect decisions by investors, 

counterparties, and customers of these firms. Those categories are 

funding costs, financial contracts that reference ratings, and ability to 

attract customers.

Market beliefs about government support could benefit a firm by lowering 

its funding costs. However, the extent to which this occurs depends in 

part on the extent to which providers of funds—such as depositors, bond 

investors, and stockholders—rely on credit ratings that assume 

government support or incorporate their own expectations of government 

support into their decisions to provide funds. For example, an investor 

that relies on credit ratings may view a firm with a rating that incorporates 

implied government support as having lower risk—other factors being 

equal—and may be more inclined to invest in the firm and accept a lower 

interest rate or return on the firm’s obligations. These effects can be more 

pronounced during a financial crisis, particularly if market strains cause 

credit rating agencies to reduce ratings more for firms they believe the 

government would not rescue and if providers of funds seek to reduce 

their risk exposures to firms they believe are not too big to fail.

Several factors influence the extent to which investors rely on ratings. For 

example, an investor’s reliance on credit ratings can depend on the extent 

to which the investor conducts its own credit analysis. While 

representatives of large investment firms with whom we spoke said they 

rely primarily on their own assessments of credit risk and do not rely on 

credit ratings, smaller investors lacking the resources to do their own 

credit analysis may rely more on credit ratings and rating agencies’

assessments of the impact of possible government support on a firm’s 

risk profile. In addition, while an investment firm’s assessment of 

government support can be relevant to funds that it actively manages, it 

may not incorporate this factor into the investment decisions of funds that 

Remaining Market 

Expectations of 

Government Support Can 

Have Benefits for Large 

Firms

Funding Costs
Page 31 GAO-14-621 Large Bank Holding Companies 

it manages using passive investment strategies.63

Representatives of large investment firms with whom we spoke generally 

said their views on the likelihood of government support do not affect their 

investment decisions. Some representatives of investment firms said that 

while they believe some probability of government rescues remains, there 

is too much uncertainty surrounding future government support to factor it 

into their current investment decisions. Several bond investors said it is 

difficult to distinguish any pricing impacts from market expectations of 

government support from the variety of other factors related to firm size 

that can impact debt pricing and investors’ investment decisions. For 

example, compared to smaller institutions, large bank holding companies 

issue bonds more frequently and in larger amounts, which increases the 

liquidity of their bonds. Investors may accept lower interest rates on more 

liquid bonds because more liquid bonds can be sold more easily without 

reducing the price. In the section addressing the second objective of this 

report, we analyze the existence and size of potential funding cost 

advantages for the largest bank holding companies using quantitative 

approaches that control for factors outside of government support that 

can influence funding cost differences.

Finally, some 

representatives of large investment firms said that while they do not rely 

on credit ratings for investment decisions, they pay attention to them 

when managing funds for clients whose investments must meet minimum 

credit rating requirements and for clients who may use credit ratings to 

assess their performance.

Higher credit ratings from assumed government support can also benefit 

firms through private contracts that reference credit ratings. For example, 

derivative contracts often tie collateral requirements to a firm’s credit 

rating. Representatives of some large bank holding companies said that

reduced credit ratings would require them to post more collateral.

Additional collateral requirements would demand additional funds that 

could otherwise be used in other investments. The largest bank holding 

companies disclose information in their financial statements about how a 

credit rating downgrade could cause them to post more collateral. While 

 63For example, an investment firm may employ a passive investment strategy by 

managing the selection and allocation of investments in a particular fund with the goal of 

matching the returns of a benchmark index. In contrast, the firm may actively manage 

other funds by choosing investments with the goal of generating returns that outperform a 

benchmark index.

Financial Contracts That 

Reference Ratings
Page 32 GAO-14-621 Large Bank Holding Companies 

estimates of these collateral impacts have varied over time and across 

firms, several of these firms have estimated that a downgrade in their 

credit rating could require them to post between $1 billion and $4 billion of 

additional collateral, depending on the size of the downgrade. Another 

way that private contracts can reference credit ratings is by setting 

minimum credit rating requirements. Examples of such requirements 

include investment funds that cannot purchase securities that are below 

minimum ratings requirements and counterparties that will not accept a 

letter of credit from a bank with a low credit rating.

Corporate customers with whom we spoke expressed varying views on 

the degree to which expectations of government support influence their 

banking decisions. Two corporate customers with whom we spoke said 

that they believe the government would intervene to prevent the failure of 

the largest bank holding companies, but that potential government 

support is only one of several factors they consider in choosing a bank 

and is not necessarily a decisive factor. Several corporate treasurers 

identified size-related factors that are unrelated to government support 

that make them more inclined to use the largest banks for their banking 

needs. For example, treasurers of global firms noted that the largest U.S. 

banks have the geographic presence and ability to provide funding on the 

scale they need to support their operations around the world. One 

corporate customer noted that although the company’s credit facility 

includes both regional banks and some of the largest banks, they tend to 

use the services of large banks more because of their capacity for 

handling large transactions and the variety of their business lines.

However, while two treasurers said that they tend to select the largest 

U.S. banks primarily for reasons that are unrelated to government 

support, their beliefs about which banks would be rescued by the 

government can impact how they manage their risk exposures to banks of 

different sizes. For example, a treasurer for a large domestic corporation 

said that the possibility of government rescues can be a factor when 

evaluating counterparty risk and the safety of deposits. She noted that in 

normal economic conditions, the likelihood of government support for 

banks is not a significant factor, but when markets become strained, her 

company may reduce its deposits and other exposures to regional banks 

they believe the government would allow to fail. Outside of these 

treasurers, a treasurer from a large global company said that potential 

government support may impact his company’s banking decisions 

indirectly through credit ratings. He noted that the company uses credit 

ratings as a factor in assessing a bank’s creditworthiness and adjusting 

its exposures to banks. For example, if a bank’s credit rating falls, the 

Ability to Attract Customers
Page 33 GAO-14-621 Large Bank Holding Companies 

company may reduce its intraday exposure to that bank by shifting 

deposits and other exposures away from that bank. A few corporate 

customers told us they do not consider the possibility of government 

support for large banks when they decide how to allocate their banking 

business.

The Dodd-Frank Act imposes new and higher fees on large bank holding 

companies and requires the Federal Reserve Board to subject large bank 

holding companies to enhanced regulatory standards for capital, liquidity, 

and risk management. These enhanced standards may help to reduce 

the likelihood and potential market impacts of the failure of a large bank 

holding company. Taken together, higher fees, stricter regulatory 

standards, and other reforms could increase costs for the largest bank 

holding companies relative to smaller competitors.64

• Deposit insurance assessments. The Dodd-Frank Act required 

FDIC to change the definition of an insured depository institution’s 

assessment base, which can affect the amount of deposit insurance 

assessment the institution pays into the deposit insurance fund.

New or revised fees 

and assessments impose higher direct costs on bank holding companies 

with more than $50 billion in total assets.

65

 64In this report, we do not attempt to quantify the extent to which such higher costs for the 

largest firms could offset benefits they receive as a result of expectations of government 

support. For example, we did not attempt to determine the differential impacts of various 

Dodd-Frank Act provisions on bank holding companies of different sizes. Implementation 

of some Dodd-Frank Act provisions specifically targets only SIFIs, while other provisions 

affect both SIFIs and non-SIFIs. Representatives of community banks and other non-SIFIs 

have noted that while some Dodd-Frank Act provisions—such as the Volcker rule— were 

intended to target activities at the largest bank holding companies, smaller banks can still 

face burdens associated with ensuring they comply with these rules. Federal financial 

regulators have acknowledged the importance of minimizing regulatory burdens for 

financial institutions and particularly for smaller banks, whose fixed costs arising from 

regulatory compliance must be spread over a smaller base of revenues.

According to FDIC, this change shifted some of the overall 

assessment burden from smaller banks to larger institutions that rely 

less on deposits but did not affect the overall amount of assessment 

revenue collected. The base was changed from total domestic 

deposits to average consolidated total assets minus average tangible 

equity. The largest bank holding companies generally saw the largest 

percentage increases in their deposit insurance assessments 

65Pub. L. No. 111-203, § 331(b), 124 Stat. 1376, 1538 (2010).

Stricter Capital and Other 

Regulatory Standards May 

Reduce Risk of Failure 

and Increase Costs for 

Largest Firms
Page 34 GAO-14-621 Large Bank Holding Companies 

because they rely less on domestic deposits for their funding than 

smaller institutions. One of the largest bank holding companies 

reported that the change to the assessment calculation resulted in a 

$600 million increase in its deposit insurance assessments in 2011. In 

the quarter after the rule became effective, those banks with less than 

$10 billion in assets saw a 33 percent drop in their assessments (from 

about $1 billion to about $700 million), while those banks with over 

$10 billion in assets saw a 17 percent rise in their assessments (from 

about $2.4 billion to about $2.8 billion).

• Fees on SIFIs. In addition, the Dodd-Frank Act directs the Federal 

Reserve Board to collect fees from bank SIFIs equal to the expenses 

the Federal Reserve Board estimates are necessary or appropriate to 

carry out its supervision and regulation of those companies.66

The Dodd-Frank Act requires the Federal Reserve Board to subject large 

bank holding companies to heightened standards for capital, liquidity, and 

stress testing, as well as other provisions, all of which could reduce the 

risk of their failure and the costs that their distress could impose on the 

financial system. Following Dodd-Frank enactment, bank SIFIs 

significantly increased their capital and liquidity in advance of finalization 

of new rules for capital, leverage, and liquidity standards. As of December

31, 2013, the six largest U.S. GSIBs had an average tier 1 common 

equity capital ratio of 12.1 percent, compared to the 4.5 percent minimum 

required under Basel III and an average of 8.4 percent among these firms 

In 

addition, the Dodd-Frank Act directs Treasury to collect assessments 

from bank and nonbank SIFIs to fund the operations of the Office of 

Financial Research. These assessments totaled $137 million in 2012 

and $35 million in 2013.

 66§ 318(c), 124 Stat. at 1527. In addition to these fee assessments related to Federal 

Reserve Board supervision, in April 2014 OCC proposed increasing the assessments it 

collects for national banks and federal savings associations with more than $40 billion in 

total assets. Assessment of Fees, 79 Fed. Reg. 23297 (Apr. 28, 2014). Under the 

proposal, the assessment increases would range from 0.32 percent to 14 percent, 

depending on the total assets of the institution reflected in its June 30, 2014, call report. 

Id. The proposed rule presented estimates of the size of the increase for institutions of 

various sizes. For example, a national bank with assets of $2 trillion would see its 

semiannual assessment increase by an estimated $9.3 million, or 14 percent. 
Page 35 GAO-14-621 Large Bank Holding Companies 

as of December 31, 2009.67 In addition, pursuant to the Dodd-Frank Act, 

the Federal Reserve Board conducts stress testing and evaluates the 

capital planning process of large bank holding companies to help ensure 

these firms are resilient to periods of economic or financial stress. In the 

most recent round of capital planning reviews, the Federal Reserve Board 

rejected the capital plan of one U.S. GSIB and required another to 

resubmit its capital plan after errors were discovered.68 Pending approval 

of their revised capital plans, the Federal Reserve Board did not allow 

proposed actions by these firms, such as dividend increases, that would 

have reduced their capital. In April 2014, U.S. bank regulators adopted a 

new rule that strengthens the leverage ratio standards for the largest, 

most interconnected U.S. banking organizations.69

Beyond the new rules and regulatory reviews to ensure capital adequacy, 

the Federal Reserve Board has indicated that eight of the largest U.S. 

 67National banking regulators classify capital as either Tier 1—currently the highest-quality 

form of capital and includes common equity—or Tier 2, which is weaker in absorbing 

losses. Tier 1, or core, capital consists primarily of common equity. Tier 2 is 

supplementary capital and includes limited amounts of subordinated debt, loan loss 

reserves, and certain other instruments. 

68On March 26, 2014, the Federal Reserve Board announced that it approved the capital 

plans of 25 bank holding companies participating in its Comprehensive Capital Analysis 

and Review (CCAR) program. It objected to the capital plans of 5 bank holding 

companies, including Citigroup Inc., one of the U.S. GSIBs. On April 28, 2014, the Federal 

Reserve Board announced that it was requiring Bank of America Corporation to resubmit 

its capital plan and to suspend planned increases in dividend distributions. The decision 

related to the disclosure by Bank of America that it incorrectly reported data used in the 

calculation of regulatory capital ratios and submitted as inputs for the most recent stress 

tests conducted by the Federal Reserve. The Federal Reserve Board can require a 

banking organization that is part of the annual CCAR program to resubmit its capital plan 

at any time if there has been or likely will be a material change in a firm’s capital position. 

12 C.F.R. § 225.8(d)(4)(i)(C)(2).

69Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio 

Standards for Certain Bank Holding Companies and Their Subsidiary Insured Depository 

Institutions, 79 Fed. Reg. 24528 (May 1, 2014). The final rule applies to U.S. bank holding 

companies with more than $700 billion in consolidated total assets or more than $10 

trillion in assets under custody (covered BHCs) and their insured depository institution 

(IDI) subsidiaries. Covered BHCs must maintain a leverage buffer greater than 2 

percentage points above the minimum supplementary leverage ratio requirement of 3 

percent, for a total of more than 5 percent, to avoid restrictions on capital distributions and 

discretionary bonus payments. IDI subsidiaries of covered BHCs must maintain at least a 

6 percent supplementary leverage ratio to be considered “well capitalized” under the 

agencies’ prompt corrective action framework. The final rule, which has an effective date 

of January 1, 2018, currently applies to eight large U.S. banking organizations that meet 

the size thresholds and their IDI subsidiaries.
Page 36 GAO-14-621 Large Bank Holding Companies 

bank holding companies will be subject to a capital surcharge—an 

increase in their risk-based capital requirement—based on their size, 

complexity, and interconnectedness.70

Higher capital and liquidity requirements for banks can increase their 

funding and other costs. For example, higher capital requirements can 

require banks to increase the portion of their funding that comes from 

equity capital rather than debt, which can increase funding costs.

Federal Reserve Board officials 

have stated that the capital surcharge is intended to force the largest 

bank holding companies to internalize the costs they could impose on the 

financial system from their systemic footprint. Federal Reserve Board and 

Treasury officials said that this capital surcharge could also help to offset 

any funding cost advantages that remain from market perceptions that the 

government would not allow the largest bank holding companies to fail.

71

Dodd-Frank also imposes additional compliance costs on large bank 

holding companies required to comply with other Dodd-Frank provisions. 

For example, as previously discussed, Dodd-Frank requires SIFIs to

In 

prior work, we have summarized the results of studies by the Bank for 

International Settlements and others on the benefits and costs of 

increasing capital requirements for banks, but these studies generally 

estimated cost impacts to the economy rather than the incidence of 

increased costs for the institutions themselves. While banks can respond 

to additional costs in a variety of ways, including passing on some costs 

to borrowers by charging higher interest rates on loans, a Federal 

Reserve Board official noted that costs associated with the GSIB capital 

surcharges—which will not apply to most banks and will not apply evenly 

among the GSIBs—may be more difficult for the largest bank holding 

companies to pass on to customers.

 70As noted earlier in this report, the Federal Reserve Board has said its proposal will be 

based on the G-SIB capital surcharge framework developed by the Basel Committee, 

under which the size of the surcharge for an individual G-SIB would vary from 1 percent to 

2.5 percent, depending on the firm’s systemic importance.

71In theory, increasing the required proportion of equity funding relative to debt funding 

should not affect a firm’s overall cost of funding as it reduces the risk that the firm will fail, 

thereby reducing the returns demanded by both equity and debt holders. However, certain 

government policies make equity financing (such as through issuing stock to investors) 

more expensive for financial institutions than debt financing. For example, interest on debt 

is tax deductible, while dividends on equity securities are not. In addition, bank deposits 

benefit from federal guarantees and the interest rates a bank pays on its insured deposits 

may not fall as capital levels and the perceived safety of the firm increases. 
Page 37 GAO-14-621 Large Bank Holding Companies 

periodically submit resolution plans to the Federal Reserve and FDIC, as 

well as to conduct company-run stress tests semiannually. Regulators 

and industry officials have stated that SIFIs have devoted significant 

staffing resources to developing these resolution plans. According to 

industry representatives, stress testing requires newly covered firms to 

incur significant compliance costs associated with building information 

systems, contracting with outside vendors, recruiting personnel, and 

developing stress testing models that are unique to their organization.

Furthermore, changes to the market infrastructure for swaps—such as 

clearing and exchange-trading requirements—and real-time reporting 

requirements for designated major swap dealers or major swap 

participants will require firms to purchase or upgrade information systems. 

Industry representatives and regulators said that while some compliance 

costs of the derivatives reforms could be recurring, a large part of these 

costs will come from one-time upfront investments to update processes 

and technology. Additionally, by generally prohibiting banks from 

engaging in proprietary trading and limiting their ability to sponsor or 

invest in hedge and private equity funds, the Volcker rule restrictions 

could eliminate past sources of trading and fee income for some banks.

As we have noted in prior work, measuring the costs of financial 

regulation is challenging because of the multitude of intervening 

variables, the complexity of the financial system, and data limitations.72

For example, the extent to which regulated institutions pass on a portion 

of their increased costs to their customers may be impacted by 

competitive forces or other factors. Other sources of uncertainty, such as 

the potential for regulatory arbitrage, add to the challenges of estimating 

the act’s potential costs. For example, increased regulation could cause

certain financial activities in the United States to move to foreign 

jurisdictions with less stringent regulations. U.S. regulators have 

acknowledged the importance of harmonizing international regulatory 

standards and noted that it can be advantageous for the United States to 

be the leader in implementing new regulatory safeguards.

 72See GAO-13-180.
Page 38 GAO-14-621 Large Bank Holding Companies 

Officials from FSOC and its member agencies have stated that financial 

reforms have not completely removed too-big-to-fail perceptions but have 

made significant progress toward doing so. In a December 2013 speech, 

Treasury Secretary Jack Lew said there is growing recognition of the 

Dodd-Frank reforms and that market analysts are factoring them into their 

assumptions. However, he noted that there is still more work to be done.

Under the Dodd-Frank Act, FSOC is, among other things, charged with 

promoting market discipline by eliminating expectations on the part of 

shareholders, creditors, and counterparties of large bank holding 

companies that the U.S. government will shield them from losses in the 

event of failure. FSOC and its member agencies monitor progress in 

addressing expectations of government support primarily through 

monitoring progress in implementing relevant Dodd-Frank reforms. 

FSOC’s 2014 annual report includes a discussion of progress made on 

OLA, enhanced prudential standards, and other relevant reforms. 

According to Treasury officials, several key areas require continued 

progress:

• International regulatory reform. In its 2013 annual report, FSOC 

writes that international coordination of financial regulation is essential 

to mitigate threats to financial stability. FDIC officials said they 

continue to work with foreign regulators to address issues related to 

creating a viable process for effecting the orderly resolution of a failing 

financial institution with significant cross-border activities. For 

example, FDIC is working with foreign counterparts on changes 

needed to ensure that derivatives contracts under other countries’

laws include a stay similar to that which applies to U.S. contracts 

under Dodd-Frank to prevent termination of these contracts by 

counterparties of a firm pulled into resolution. Federal Reserve Board 

staff said U.S. regulators are considering steps that may be needed to 

help ensure that foreign regulators do not take disruptive actions with 

respect to foreign operations of a U.S. firm pulled into resolution. They 

noted that global U.S. SIFIs may need to create intragroup loss 

absorbency arrangements that provide clarity and assurance to 

foreign regulators about how loss absorbency from the U.S. holding 

company will be made available to support foreign operations during a 

resolution.

• The Federal Reserve’s long-term debt requirement. The Federal 

Reserve Board has identified the implementation of a long-term debt 

requirement as a regulatory priority that it and other agencies are 

actively considering. In testimony before the Senate Banking 

Agencies See Progress in 

Addressing Too-Big-to-Fail 

Perceptions and Expect 

Further Progress as 

Reforms Are More Fully 

Implemented
Page 39 GAO-14-621 Large Bank Holding Companies 

Committee, Federal Reserve Board Governor Daniel Tarullo said that 

successful resolution without taxpayer assistance would be most 

effectively accomplished if a firm has sufficient long-term, unsecured 

debt to absorb additional losses and to recapitalize the business 

transferred to a bridge operating company.

• General education of market participants on reforms. Treasury 

officials identified the education of market participants as a key area 

for progress. Public outreach and education often take the form of 

speeches from agency officials and meetings with industry 

stakeholders. Regulators also solicit feedback on proposed 

rulemakings and regulations during public comment periods. For 

example, on December 18, 2013, FDIC published a public notice on 

the framework for a SPOE approach for resolution of failed financial 

institutions under OLA and solicited comments from the public through 

February 18, 2014, before subsequently extending the comment 

period through March 20, 2014.73

Treasury officials also monitor market trends and outside research to 

inform their assessment of progress in addressing too-big-to-fail 

perceptions. Treasury staff have looked at trends in bond prices, creditdefault-swap prices, and other market data for bank holding companies of 

different sizes for evidence that investors have reduced their expectations 

of government support. Treasury staff also monitor relevant outside 

research, including a growing body of research by academics and others 

that has used quantitative approaches to analyze the existence and size 

of potential funding cost advantages that the largest bank holding 

companies could receive because of market expectations of government 

support. The next section of this report includes a summary of selected 

studies in this literature and discusses the strengths and limitations of the 

methods they use. FSOC and Treasury staff have reviewed these studies 

and noted that while the studies have limitations, their findings are 

consistent with a reduction in expectations of government support 

following the Dodd-Frank Act.

 73Resolution of Systemically Important Financial Institutions: The Single Point of Entry 

Strategy, 78 Fed. Reg. 243 (Dec. 18, 2013); Resolution of a Systemically Important 

Financial Institution: The Single Point of Entry Strategy, 79 Fed. Reg. 9899 (Feb. 21, 

2014).
Page 40 GAO-14-621 Large Bank Holding Companies 

Our analysis and the results of studies we reviewed provide evidence that 

the largest bank holding companies had lower funding costs than smaller 

bank holding companies during the 2007-2009 financial crisis but that 

differences may have declined or reversed in more recent years. To 

inform our econometric approach, we reviewed studies that estimated 

funding cost differences between large and small financial institutions that 

could be associated with the perception that some institutions are too big 

to fail. Studies we reviewed generally found that the largest financial 

institutions had lower funding costs during the 2007-2009 financial crisis 

but that the difference between the funding costs of the largest and 

smaller financial institutions has since declined. In some cases these 

findings could be interpreted as evidence of advantages driven by toobig-to-fail perceptions; however, these empirical analyses are imperfect 

and contain a number of limitations that could reduce their validity or 

applicability to U.S. bank holding companies. Our analysis, which 

addresses certain limitations of these studies, also provides evidence that 

large or systemically important bank holding companies had lower 

funding costs than smaller bank holding companies during the 2007-2009 

financial crisis, which may have been associated with expectations of 

government assistance. In addition, our analysis provides some evidence 

that funding cost differences may have declined or reversed in recent 

years and that large bank holding companies may have had higher 

funding costs since the crisis. However, we also analyzed what funding 

cost differences might have been since the crisis in hypothetical 

scenarios where levels of credit risk in every year from 2010 to 2013 are 

assumed to be as high as they were during the financial crisis. This 

analysis suggests that large bank holding companies might have had 

lower funding costs than smaller bank holding companies since the crisis 

if levels of credit risk had remained high, indicating that changes in 

funding cost differences over time may be due in part to improvements in 

bank holding companies’ financial conditions. Although our analysis 

improves on certain aspects of prior studies, important limitations remain 

and our results should be interpreted with caution.

Studies we reviewed generally found that the largest financial institutions 

had lower funding costs than smaller ones during the 2007-2009 financial 

crisis but that the difference between the funding costs of the largest and 

smaller financial institutions has since declined. In some cases these 

findings could be interpreted as evidence of advantages driven by toobig-to-fail perceptions; however, these empirical analyses are imperfect 

and contain a number of limitations that could reduce their validity or 

applicability to U.S. bank holding companies.

Evidence Suggests 

Large Banks Had a 

Funding Cost 

Advantage over Small 

Ones during the 

Financial Crisis That 

May Have Declined 

or Reversed Since

Studies Generally Found 

the Largest Banks Had 

Lower Funding Costs 

during the Financial Crisis 

but Results Have 

Limitations
Page 41 GAO-14-621 Large Bank Holding Companies 

We reviewed studies that estimated the funding cost difference between 

large and small financial institutions that could be associated with the 

perception that some institutions are too big to fail. We evaluated studies 

that met the following criteria: (1) used a comparative empirical approach 

that attempted to account for differences across financial institutions that 

could influence funding costs, (2) included U.S. bank holding companies, 

and (3) included analysis of data from 2002 or later. See our scope and 

methodology section for more information on our criteria and approach.

The 16 studies we reviewed made a wide variety of methodological 

decisions and came to a range of conclusions. We present the variety of 

methodological decisions along two key dimensions—which source of 

funding is analyzed (e.g., deposits, bonds) and time period of analysis—in 

table 2 below. The source of funding that is analyzed is an important 

methodological decision because investors may have differing 

expectations regarding the likelihood that various sources of funding 

might receive government support, and these expectations could differ by 

the size of the financial institution. Results could differ across studies 

because of differences in creditor priority (subordinated debt versus 

senior debt) or maturity (bonds that mature several years in the future 

versus deposits that can be demanded at any time). We also include 

information in table 2 on the reported affiliations of the study authors.

Table 2: Empirical Studies of Too-Big-to-Fail Funding Cost Differences

Study authors (Year) Measure of funding cost Time period Affiliation category

Acharya, Anginer & Warburton (2013) Bonds 1990-2011 Academic

Araten & Turner (2012) Combination of funding sources 2002-2011 Privatea 

Balasubramnian & Cyree (2014) Bondsb 2009-2011 Academic

Balasubramnian & Cyree (2013) Bondsc 2009-2011 Academic

Barth & Schnabel (2013) Credit default swaps 2005-2011 Academic

Bertay, Demirgüç-Kunt & Huizinga (2013) Combination of funding sources 1990-2011 Academic and public 

International Monetary Fund (2014) Credit ratings, credit default swaps 2005-2014 Public 

Jacewitz & Pogach (2012) Deposits 2005-2010 Public

Keppo & Yang (2013) Bonds, deposits 1990-2011 Academic and public 

Kumar & Lester (2014a) Deposits 2006-2012 Privated

Kumar & Lester (2014b) Bonds 2009-2013 Privated

Li et al. (2011) Credit default swaps 2001-2010 Private

Santos (2014) Bonds 1985-2009 Public

Tsesmelidakis & Merton (2012) Credit default swaps 2002-2010 Academic and private

Ueda & Di Mauro (2012) Credit ratings 2007, 2009 Academic and public
Page 42 GAO-14-621 Large Bank Holding Companies 

Study authors (Year) Measure of funding cost Time period Affiliation category

Völz & Wedow (2009) Credit default swaps 2002-2007 Public

Source :GAO | GAO-14-621

Note: We read and evaluated studies that met the following criteria: (1) used a regression or similar 

comparative empirical methodology to estimate any funding cost difference, (2) included U.S. bank 

holding companies, and (3) included analysis of data from 2002 or later. Our criteria excluded studies 

that used option-pricing approaches—this methodology assumes a too-big-to-fail funding cost 

advantage exists and only estimates its magnitude. We identified author affiliations based on 

information included in the papers, which may not reflect all relevant affiliations. Academic affiliation 

includes authors at universities or research institutes. Private affiliation includes authors at financial 

institutions and other private firms. Public affiliation includes authors at government and regulatory 

agencies (including the regional Federal Reserve banks which are private corporations), and 

international financial institutions such as the World Bank. We also excluded two studies that 

otherwise met our criteria but did not attempt to control for important differences between financial 

institutions. We were aware of potential conflicts of interest associated with a number of studies in our 

review. As with other studies we reviewed, these studies must have attempted to address factors that 

might account for differences in funding costs in order to be included, and we also considered the 

potential impact these conflicts of interest might have on their methods and results. See our scope 

and methodology for more details on our approach.

a

This study was conducted by researchers at JP Morgan Chase.

b

This study focused on subordinated bonds.

c

This study focused on senior bonds.

d

This study was conducted by researchers at Oliver Wyman and sponsored by the Clearinghouse 

Association, a trade association of the world’s largest commercial banks.

Studies we reviewed generally found that the largest financial institutions 

had lower funding costs than smaller ones during the 2007-2009 financial 

crisis, but that the difference between the funding costs of the largest and 

smaller financial institutions has since declined. For example, one study 

estimated that large U.S. financial institutions had roughly 100 basis 

points lower bond funding costs than smaller ones in 2009, but this 

difference had declined to around 40 basis points by 2011.74 Similarly, a 

study of U.S. bank credit default swaps found that large U.S. bank holding 

companies had roughly 100 basis points lower funding costs in 2009, but 

this difference had declined to around 15 basis points in 2013.75

 74A basis point is one one-hundredth of a percentage point. Viral V. Acharya, Deniz 

Anginer and A. Joseph Warburton, “The End of Market Discipline? Investor Expectations 

of Implicit State Guarantees,” Social Science Research Network Working Paper

(December 2013).

In some 

cases these differences could be interpreted as evidence of funding cost 

advantages driven by too-big-to-fail perceptions. In other cases, 

limitations in the studies make it difficult to eliminate other explanations of 

75International Monetary Fund, “How Big is the Implicit Subsidy for Banks Considered Too 

Important to Fail?” Global Financial Stability Report, Ch. 3 (Washington, D.C.: 2014).
Page 43 GAO-14-621 Large Bank Holding Companies 

why funding cost differences might exist—such as greater liquidity or 

diversification that could be associated with size or spurious results driven 

by imperfect measures of funding costs. Time period of analysis was 

another important difference across studies we reviewed. Few studies in 

our review included data beyond 2011. Therefore, most results may not 

reflect recent changes in the regulatory environment and market 

expectations discussed earlier in the report.

Studies also varied in their approach to identifying financial institutions 

that might be perceived as too big to fail, using a variety of size and other 

thresholds. For example, some studies measured too-big-to-fail status by 

a bank’s assets; however, the threshold between too-big-to-fail and other 

banks varied from $50 billion to $500 billion. Several papers estimated 

too-big-to-fail status by size relative to industry, such as the largest 20 

banks or top 10 percent by assets. These different approaches indicate 

that there is no consensus within the literature on which financial 

institutions may be considered too big to fail for the purposes of 

comparing funding costs.

The studies we reviewed can be grouped into categories based on their 

approaches. While all studies included in our review used standard 

approaches and attempted to address factors that might account for 

differences in funding costs, these empirical analyses remain imperfect.

• Regression. Most studies we reviewed adopted a regression 

methodology in which some measure of funding costs was explained 

by a variety of control variables, such as risk, liquidity, and maturity, to 

attempt to account for differences across financial institutions. These 

models are standard empirical tools and are flexible in terms of the 

information about financial institutions and markets that they can 

incorporate. In some instances these models rely on a small number 

of indicators that may only imperfectly measure underlying default 

risks. As a result, some analyses may not correctly estimate the size 

of any too-big-to-fail advantages because they omit important factors 

that influence funding costs. In other studies that account for a more 

thorough set of factors that influence funding costs, results may be 

sensitive to alternative measurements of these factors.76

 76Results of these models will also be sensitive to the typical assumption that the impact 

of variables on funding costs is linear—that is, changes in credit risk and liquidity have a 

constant and proportional impact on funding costs.

For example, 
Page 44 GAO-14-621 Large Bank Holding Companies 

default risk is an underlying driver of funding costs, and studies may 

produce different results by using a bank’s earnings volatility as an 

indicator for default risk as opposed to other indicators such as the 

quality of a bank’s assets. In addition, liquidity is another important 

factor to account for when attempting to explain funding cost 

differences—investors charge banks more for less liquid sources of 

funding—and some studies do not adequately control for the liquidity 

of the funding source. Challenges similar to those involved in 

accurately capturing default risk arise in finding appropriate indicators 

for a bond’s liquidity.

• Equity-based. Three papers we reviewed measured the difference 

between observed credit default swap spreads (which approximate 

bond funding costs) and hypothetical credit default swap spreads 

(which are estimated based on information implied by equity prices).77

This approach estimates hypothetical spreads with a standard 

theoretical model used in finance that uses the risk of a firm’s equity 

to estimate the risk of a firm’s debt.78 In doing so, the approach 

assumes that hypothetical spreads derived from equity prices are not

influenced by any expectations of government support, but that 

observed credit default swap spreads are influenced by such 

expectations. By comparing the two spreads the approach can 

estimate the magnitude of expectations of government support. While 

this approach has some advantages, it relies on critical assumptions 

about how a limited number of factors influence the risk of default.79

 77International Monetary Fund, “How Big is the Implicit Subsidy for Banks Considered Too 

Important to Fail?” Global Financial Stability Report, Ch. 3 (Washington, D.C.: 2014), Zoe 

Tsesmelidakis and Robert C. Merton, “The value of implicit guarantees,” Social Science 

Research Network working paper, September 1, 2012, and Zan Li, Shisheng Qu and Jing 

Zhang, Quantifying the Value of Implicit Government Guarantees for Large Financial 

Institutions (Moody’s Analytics, 2011).

78This approach can be referred to as a “Merton model” based on Robert C. Merton, “On 

the pricing of corporate debt: the risk structure of interest rates,” Journal of Finance vol. 

29, 1974. Holders of equity and debt in a bank both face a risk of loss. Equity holders face 

a higher risk because they are the first to take losses in a failure (i.e., debt holders have 

higher priority). However, the risk that a debt holder will take a loss is likely to be 

proportional to—but smaller than—the risk facing an equity holder. As a result, one can 

estimate the risk of default on a debt based in part on the volatility of the stock price of the 

bank.

79Another weakness of this model is that the market pricing of credit default swaps may 

not be reliable during a crisis. 
Page 45 GAO-14-621 Large Bank Holding Companies 

As a result, these analyses may also omit important factors that 

influence funding costs, such as earnings.80

• Ratings-based. Two papers used Fitch credit ratings to estimate the 

funding cost difference that could be associated with potential 

government support.81 Models based on credit ratings offer a 

convenient way to incorporate all the factors the rating agency 

considers relevant to default risk and take advantage of the rating 

agency’s explicit separation of the impact of expected government 

support through, for example, the assignment of a standalone credit 

rating (assuming no government support) and a higher credit rating 

assuming government support.82

In addition to the approach-specific limitations, a number of general 

limitations related to implementation of the various approaches exist 

across studies we reviewed that could reduce their validity or applicability 

to U.S. bank holding companies. For example, studies varied in the 

However, this approach assumes 

that all information about market expectations of default risk and 

government support are incorporated into credit ratings, which is a 

potentially weak assumption. Credit ratings had a limited impact on 

the views of large investors we interviewed, as previously discussed.

Moreover, funding costs vary for firms within a particular rating. As a 

result, these studies may estimate funding costs with considerable 

error. Finally, results of these studies are sensitive to the credit rating 

agency used—for example, results based on Moody’s ratings could 

be quite different than other rating agencies because Moody’s 

removed expectations of government support for U.S. bank holding 

companies in 2013.

 80See Sreedhar T. Bharath and Tyler Shumway, “Forecasting default with the Merton 

distance to default model,” Review of Financial Studies, vol. 21, no. 3, May 2008.

81International Monetary Fund, “How Big is the Implicit Subsidy for Banks Considered Too 

Important to Fail?” Global Financial Stability Report, Ch. 3 (Washington, D.C.: 2014), and 

Kenichi Ueda and Beatrice Weder di Mauro, “Quantifying structural subsidy values for 

systemically important financial institutions,” Journal of Banking & Finance vol. 37, no. 10, 

October 2013.

82In assessing the creditworthiness of bank holding companies, all three major rating 

agencies discuss the extent to which a rating is influenced by potential government 

support, though the specific approach differs by rating agency. By comparing a bank 

holding company’s credit rating—with and without expected government support—to the 

average historical funding cost for corporations at those ratings, one can estimate the 

benefit of the amount of government support associated with the rating uplift.
Page 46 GAO-14-621 Large Bank Holding Companies 

countries that were included in the analysis—some studies focused on 

the United States, while others included a broad cross-section of more 

than 20 countries. Studies that pooled a large number of countries in their 

analysis have results that may not be applicable to U.S. bank holding 

companies. For example, studies that included Switzerland and Iceland in 

their analyses may not apply to the United States because banking 

sectors in those countries are much larger relative to the economy. As 

noted above, because few studies included data past 2011, results may 

not reflect recent changes in the regulatory environment and market 

sentiment; for example, the Federal Reserve’s rule for enhanced 

prudential standards for large bank holding companies and FDIC’s 

proposed strategy for orderly liquidation.

As a result of the limitations associated with these methodological 

choices, estimates of the size of the funding cost difference associated 

with a too-big-to-fail advantage based on this literature—while suggestive 

of general trends—are not definitive and should be interpreted with 

caution.

We conducted our own analysis to assess the extent to which the largest 

bank holding companies have had lower funding costs as a result of 

perceptions that the government would not allow them to fail. Overall, our 

analysis provides some evidence that large or systemic bank holding 

companies had lower funding costs than smaller ones during the 2007-

2009 financial crisis that may have been associated with expectations of 

government assistance. Our analysis provides only limited evidence that 

large bank holding companies had lower funding costs since the crisis 

and instead provides some evidence that the opposite may have been 

true at the levels of credit risk that prevailed in those years. However, in 

hypothetical scenarios where levels of credit risk in every year from 2010 

to 2013 are assumed to be as high as they were during the financial 

crisis, our analysis suggests that large bank holding companies might 

have had lower funding costs than smaller bank holding companies. 

Although our analysis improves on certain aspects of prior studies, 

important limitations remain and our results should be interpreted with 

caution.

To conduct our analysis, we developed a series of econometric models—

models that use statistical techniques to estimate the relationships 

between quantitative economic and financial variables—based on our 

assessment of relevant studies and expert views. These models estimate 

the relationship between bank holding companies’ bond funding costs 

GAO Analysis Suggests 

Large Banks Had Lower 

Funding Costs during the 

Financial Crisis but This 

Advantage May Have 

Declined or Reversed 

Since
Page 47 GAO-14-621 Large Bank Holding Companies 

and their size, while also controlling for other drivers of bond funding 

costs, including credit risk and bond liquidity. Key features of our 

econometric approach include the following:

• U.S. bank holding companies. To better understand the relationship 

between bank holding company funding costs and size in the context 

of the U.S. economic and regulatory environment, we only analyzed 

U.S. bank holding companies. In contrast, some of the literature we 

reviewed analyzed nonbank financial companies and foreign 

companies.

• 2006-2013 time period. To better understand the relationship 

between bank holding company funding costs and size in the context 

of the current economic and regulatory environment, we analyzed the 

period from 2006 through 2013, which includes the recent financial 

crisis as well as years before the crisis and following the enactment of 

the Dodd-Frank Act. In contrast, some of the literature we reviewed 

did not analyze data in the years after the financial crisis.

• Bond funding costs. We used bond yield spreads as our measure of 

bank holding company funding costs because they are a direct 

measure of what investors charge bank holding companies to borrow 

money and because they are sensitive to credit risk and hence 

expected government support. This indicator of funding costs has 

distinct advantages over certain other indicators used in studies we 

reviewed, including credit ratings, which do not directly measure 

funding costs, and total interest expense, which mixes the costs of 

funding from multiple sources.

• Alternative measures of size. Size or systemic importance can be 

measured in multiple ways, as reflected in our review of the literature. 

Based on that review and the comments we received from external 

reviewers, we used four different measures of size or systemic 

importance: total assets, total assets and the square of total assets, 

whether or not a bank holding company was designated a GSIB by 

the Financial Stability Board in November 2013, and whether or not a 

bank holding company had assets of $50 billion or more.

• Extensive controls for bond liquidity, credit risk, and other key 

factors. To account for the many factors that could influence funding 

costs, we controlled for credit risk, bond liquidity, and other key factors 

in our models. We included a number of variables that are associated 

with the risk of default, including measures of capital adequacy, asset 

quality, earnings, and volatility. We also included a number of 
Page 48 GAO-14-621 Large Bank Holding Companies 

variables that can be used to measure bond liquidity. Finally, we 

included variables that measure other key characteristics of bonds, 

such as time to maturity, and key characteristics of bank holding 

companies, such as operating expenses. Our models include a 

broader set of controls for credit risk and bond liquidity than some 

studies we reviewed and, as we discuss later, we directly assess the 

sensitivity of our results to using alternative controls on our estimates 

of funding costs.

• Multiple model specifications. In order to assess the sensitivity of 

our results to using alternative measures of size, bond liquidity, and 

credit risk discussed above, we estimated multiple different model 

specifications. We developed models using four alternative measures 

of size, two alternative sets of measures of capital adequacy, six 

alternative measures of volatility, and three alternative measures of 

bond liquidity to assess the impact of using alternative measures on 

our results. In contrast, some of the studies we reviewed estimated a 

more limited number of model specifications.

• Annual estimates of models. To allow for changes in investors’

beliefs about the likelihood of government rescues between the years 

of the financial crisis—when emergency government programs 

designed to assist financial institutions were available—and the years 

following the crisis, our models allow the relationship between bank 

holding company funding costs and size to vary over time. In contrast, 

some of the studies we reviewed assumed that the relationship 

between bank holding company funding costs and size was constant 

over time.

• Link between size and credit risk. To account for the possibility that 

investors’ beliefs about government rescues affect their 

responsiveness to credit risk, our models allow the relationships 

between bank holding company funding costs and credit risk to 

depend on size.

Altogether, we estimated 42 different models for each year from 2006 

through 2013 and then used these models to compare bond yield 

spreads—our measure of bond funding costs—for bank holding 
Page 49 GAO-14-621 Large Bank Holding Companies 

companies of different sizes but with the same level of credit risk.83 Figure 

1 shows our models’ comparisons of the difference between bond funding 

costs for bank holding companies with $1 trillion in assets and average 

credit risk and bond funding costs for similar bank holding companies with 

$10 billion in assets, for each model and for each year.84 Each circle and 

dash in figure 1 shows the comparison of bond funding costs for a 

different model. Circles show model-estimated differences that were 

statistically significant at the 10 percent level, while dashes represent 

differences that were not statistically significant at that level.85

 83Our models allow the size of a bank holding company to influence its bond funding costs 

directly and also indirectly through the interaction between size and credit risk. As a result, 

no single parameter is sufficient to describe the relationship between bond funding costs 

and size. To summarize the overall relationship between bond funding costs and size 

reflected in each specification, we calculated bond funding costs for bank holding 

companies of different sizes and credit risk levels using our estimates of the parameters 

for each specification for each year. See appendix I for more details on these calculations.

Circles and 

dashes below zero correspond to models suggesting that bank holding 

companies with $1 trillion in assets have lower bond funding costs than 

bank holding companies with $10 billion in assets, and vice versa. 

84We also compared funding costs for bank holding companies with $50 billion, $100 

billion, $250 billion, and $500 billion in assets to bank holding companies with $10 billion 

in assets. See appendix I. 

85Many of the estimates that were statistically significant at the 10 percent level were also 

statistically significant at the 5 percent or 1 percent level. See table 5 in appendix I.
Page 50 GAO-14-621 Large Bank Holding Companies 

Figure 1: Estimates from 42 Models of Average Bond Funding Cost Differences between Bank Holding Companies with $1 

Trillion and $10 Billion in Assets, 2006-2013

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated 42 models for each year from 2006 through 2013 to assess the sensitivity of estimated 

funding cost differences to alternative measures of capital adequacy, volatility, bond liquidity, and size 

or systemic importance. We used the models to compare bond funding costs for bank holding 

companies of different sizes but the same levels of credit risk, bond liquidity, and other 

characteristics. This figure compares bond funding costs for bank holding companies with $1 trillion 

and $10 billion in assets, for each model and for each year, with average levels of credit risk. Each 

circle and dash shows the comparison for a different model, where circles and dashes below zero 

suggest bank holding companies with $1 trillion in assets have lower bond funding costs than bank 

holding companies with $10 billion in assets, and vice versa.

Our analysis provides evidence that the largest bank holding companies 

had lower funding costs during the 2007-2009 financial crisis but that 

differences may have declined or reversed in recent years. However, we 

found that the outcomes of our econometric models varied with the 

various controls we used to capture size, credit risk, and bond liquidity.

This variation indicates that uncertainty related to how to model funding 

costs has an important impact on estimated funding cost differences 
Page 51 GAO-14-621 Large Bank Holding Companies 

between large and small bank holding companies. As figure 1 shows, 

most models found that larger bank holding companies had lower bond 

funding costs than smaller bank holding companies during the 2007-2009 

financial crisis, but the magnitude of the difference varied widely across 

models, as indicated by the range of results for each year. For example, 

for 2008, our models suggest that bond funding costs for bank holding 

companies with $1 trillion in assets and average credit risk were from 17 

to 630 basis points lower than bond funding costs for similar bank holding 

companies with $10 billion in assets. For 2009, our models suggest that 

bond funding costs for bank holding companies with $1 trillion in assets 

and average credit risk were from 30 to 628 basis points lower than bond 

funding costs for similar bank holding companies with $10 billion in 

assets.

Our models’ comparisons of bond funding costs for different-sized bank 

holding companies for 2010 through 2013 also vary widely. For bank 

holding companies with average credit risk, more than half of our models 

suggest that larger bank holding companies had higher bond funding 

costs than smaller bank holding companies from 2011 through 2013, but 

many models suggest that larger bank holding companies still had lower 

bond funding costs than smaller ones during this period. For example, for 

2013, our models suggest that bond funding costs for average credit risk 

bank holding companies with $1 trillion in assets ranged from 196 basis 

points lower to 63 basis points higher than bond funding costs for similar 

bank holding companies with $10 billion in assets (see fig. 1). For 2013, 

thirty of our models suggest that the larger banks had higher funding 

costs, and 12 of our models suggest that the larger banks had lower

funding costs.

Our models’ comparisons were particularly sensitive to the measure of 

size or systemic importance we used. For example, for 2013, models that 

used total assets as the indicator of size or systemic importance suggest 

that bond funding costs for bank holding companies with $1 trillion in 

assets and average credit risk ranged from 23 to 59 basis points higher 

than bond funding costs for similar bank holding companies with $10 

billion in assets (see fig. 2). Models that used the GSIB designation 

suggest that bond funding costs for bank holding companies with $1 

trillion ranged from 11 basis points lower to 36 basis points higher than 

bond funding costs for bank holding companies with $10 billion in assets. 

Models that used total assets and the square of total assets—which 

allows for a nonlinear relationship between size and yield spreads—

suggest that bond funding costs for bank holding companies with $1 

trillion in assets ranged from 52 basis points lower to 4 basis points higher 
Page 52 GAO-14-621 Large Bank Holding Companies 

than bond funding costs for bank holding companies with $10 billion in 

assets. Finally, models that used whether or not a bank holding company 

had $50 billion in assets suggest that bond funding costs for bank holding 

companies with $1 trillion ranged from 161 to 196 basis points lower than 

bond funding costs for bank holding companies with $10 billion in assets.

Figure 2: Difference in Estimated Bond Funding Costs for Average Credit Risk Bank Holding Companies with $1 Trillion 

versus $10 Billion in Assets by Indicator of Size or Systemic Importance, 2013

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated multiple models for each year from 2006 through 2013 to assess the sensitivity of 

estimated funding cost differences to alternative measures of capital adequacy, volatility, bond 

liquidity, and size or systemic importance. We used the models to compare bond funding costs for 

bank holding companies of different sizes but the same levels of credit risk, bond liquidity, and other 

characteristics. This figure compares bond funding costs for bank holding companies with $1 trillion 

and $10 billion in assets with average levels of credit risk for 2013 for models that differ in how they

measure size. Each circle and dash shows the comparison for a different model, where circles and 

dashes below zero suggest bank holding companies with $1 trillion in assets have lower bond funding 

costs than bank holding companies with $10 billion in assets, and vice versa.
Page 53 GAO-14-621 Large Bank Holding Companies 

We also found that our models’ comparisons of bond funding costs for 

bank holding companies of different sizes varied depending on bank 

holding companies’ level of credit risk. For low credit risk bank holding 

companies, most models suggest that bond funding costs for larger bank 

holding companies were lower than bond funding costs for smaller bank 

holding companies during the 2007-2009 financial crisis and that bond 

funding costs for larger bank holding companies were higher than bond 

funding costs for smaller bank holding companies from 2010 through 

2013. Depending on the year, 25 to 42 of our 42 models suggest that 

bond funding costs for larger, low risk bank holding companies were 

lower during the financial crisis, while 31 to 41 of our 42 models suggest 

that bond funding costs for larger low risk bank holding companies were 

higher following the crisis. However, for high credit risk bank holding 

companies, most models suggest that bond funding costs for larger bank 

holding companies were lower than bond funding costs for smaller bank 

holding companies in every year (28 to 41 of our 42 models, depending 

on the year).

Given that most models suggest that large bank holding companies’ bond 

funding costs are typically lower than small bank holding companies’

bond funding costs at high levels of credit risk, this suggests that sizerelated funding cost differences that favor large bank holding companies 

are more likely to emerge when the likelihood that a bank holding 

company will fail increases. As we discuss later, investors’ overall beliefs 

about the likelihood of government support may have several 

components, including beliefs about whether or not a bank holding 

company will fail—which is related to its credit risk—and beliefs about 

whether or not a bank holding company will be supported by the 

government if it fails. For example, investors may believe that larger bank 

holding companies are more likely to be supported than smaller bank 

holding companies in the event of failure, but investors may also believe 

that all bank holding companies are relatively safe and unlikely to fail. In 

this case, investors’ overall expectations of government support for all 

bank holding companies are likely to be low, and differences in funding 

costs due to varying expectations of government support for bank holding 

companies of different sizes are likely to be small or nonexistent. In 

contrast, if investors believe that all bank holding companies are risky and 

prone to fail, then investors’ overall expectations of government support 

for larger bank holding companies are likely to be higher than for smaller 

bank holding companies, and differences in funding costs are likely to be 

greater.
Page 54 GAO-14-621 Large Bank Holding Companies 

To assess how investors’ beliefs that the government will support failing 

bank holding companies have changed over time, we compared bond 

funding costs for bank holding companies of various sizes while holding 

the level of credit risk constant over time at the average for 2008—a 

relatively high level of credit risk that prevailed during the financial crisis.86

In these hypothetical scenarios, most models suggest that bond funding 

costs for larger bank holding companies would have been lower than 

bond funding costs for smaller bank holding companies in most years. For 

example, most models for 2013 predict that bond funding costs for larger 

bank holding companies would be higher than for smaller bank holding 

companies at the average level of credit risk in that year, but would be 

lower at financial crisis levels of credit risk (see fig. 3). These results 

suggest that changes over time in funding cost differences we estimated 

(depicted in fig. 1) have been driven at least in part by improvements in 

the financial condition of bank holding companies.87 At the same time, 

more models predict lower bond funding costs for larger bank holding 

companies in 2008 than in 2013 when we assume that financial crisis 

levels of credit risk prevailed in both years, which suggests that investors’ 

expectations of government support have changed over time.88

 86Although higher, credit risk in 2008 was not outside the range of credit risk in 2013 in 

every dimension. Specifically, the average values of the credit risk variables for 2008 were 

less than the maximum values of the credit risk variables for 2013, with the exceptions of 

the variables measuring equity price volatility, option implied volatility, equity return 

volatility, and excess equity return volatility. 

However, 

it is important to note that the relationships between variables estimated

by our models could be sensitive to the average level of credit risk among 

bank holding companies, making these estimates of the potential impact 

of the level of credit risk from 2008 in the current environment even more 

uncertain. Moreover, Dodd-Frank Act reforms discussed earlier in this 

report, such as enhanced regulatory standards for capital and liquidity, 

could enhance the stability of the U.S. financial system and make such a 

credit risk scenario less likely. However, the extent to which such benefits 

will materialize depends on many factors that remain difficult to predict.

87As discussed earlier in this report, many investment firm representatives with whom we 

spoke credited enhanced regulatory standards with improving the safety and soundness 

of the largest bank holding companies and reducing the likelihood that they would 

experience distress that could result in failure or government support. 

88To see this, compare the 2008 estimates in figure 1 to the “financial crisis level” 

estimates for 2013 in figure 3. Both sets of estimates are derived assuming that the level 

of credit risk is equal to the average for 2008.
Page 55 GAO-14-621 Large Bank Holding Companies 

Figure 3: Difference in Estimated Bond Funding Costs for Bank Holding Companies 

with $1 Trillion versus $10 Billion in Assets by Level of Credit Risk, 2013

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated 42 models for each year from 2006 through 2013 to assess the sensitivity of estimated 

funding cost differences to alternative measures of capital adequacy, volatility, bond liquidity, and size 

or systemic importance. We used the models to compare bond funding costs for bank holding 

companies of different sizes but the same levels of credit risk, bond liquidity, and other 

characteristics. This figure compares bond funding costs for bank holding companies with $1 trillion 

and $10 billion in assets, for each model for 2013, with the average level of credit risk in 2013 and the 

average level of credit risk in 2008 during the financial crisis. Each circle and dash shows the 

comparison for a different model, where circles and dashes below zero suggest bank holding 

companies with $1 trillion in assets have lower bond funding costs than bank holding companies with 

$10 billion in assets, and vice versa.
Page 56 GAO-14-621 Large Bank Holding Companies 

Our estimates of the relationship between the size of a bank holding 

company and the yield spreads on its bonds are limited by several factors 

and should be interpreted with caution. These factors present challenges 

to using our results and the results of other studies as the basis for public 

policy responses to concerns about the risks posed by large financial 

institutions.

Investors’ beliefs about the likelihood of government support are 

composed of several different elements, including the likelihood that a 

bank holding company will fail, the likelihood that it will be rescued by the 

government if it fails, and the size of the losses that the government may 

impose on investors if it rescues the bank holding company. Like the 

methodologies used in the literature we reviewed, our methodology does 

not allow us to precisely identify the influence of each of these factors. As 

a result, changes over time in our estimates of the relationship between 

bond funding costs and size may reflect changes in one or more of these 

components, but we cannot identify which with certainty. For example, if 

bond funding costs for a bank holding company with $1 trillion are less 

than those for a bank holding company with $10 billion but the difference 

decreases over time, this trend may indicate that investors believe that 

the larger bank holding company is relatively less likely to fail, which 

could be the case if the level of credit risk is falling over time, either due to 

market pressure, regulatory requirements, or other reasons. This trend 

could also indicate that investors believe that the government has 

become less likely to rescue the larger bank holding company if it fails or 

more likely to impose losses on investors in a rescue.

In addition, our estimates of differences in bond funding costs for bank 

holding companies of different sizes may reflect factors other than 

investors’ beliefs about the likelihood of government support. We have 

taken into account many of the factors that may help explain differences 

in yield spreads for bank holding companies of different size, such as 

credit risk and bond liquidity. However, we may not have taken into 

account all possible factors. If a factor that we have not taken into 

account is associated with size, then our results may reflect the 

relationship between bond funding costs and this omitted factor instead 

of, or in addition to, the relationship between bond funding costs and bank 

holding company size.

Our estimates of differences in bond funding costs for bank holding 

companies of different sizes may also reflect differences in the 

characteristics of bank holding companies that choose to issue bonds. 

Bank holding companies that issue bonds may differ from those that do 

Estimates of Size-Related 

Funding Cost Differences 

Should Be Interpreted with 

Caution
Page 57 GAO-14-621 Large Bank Holding Companies 

not in ways that may or may not be observable. If such differences exist 

and are unobservable, then our models’ comparisons are likely to be 

consistently either too high or too low depending on the relationship 

between size and the relevant unobservable characteristic. However, if 

bank holding companies that issue bonds differ from those that do not in 

ways that are observable in our model, then our models’ comparisons of 

bond funding cost differences for bank holding companies of different

sizes are unlikely to be consistently either too high or too low. We found 

some evidence that this may be the case. Investors with whom we spoke 

told us that larger bank holding companies are generally more likely to 

issue bonds than smaller ones because they can issue a large enough 

quantity of debt to satisfy investors’ demand for liquidity and to allow 

investors to make a large enough investment to cover their transaction

costs. Thus, size, which is observable, may be an important difference 

between bank holding companies that issue bonds and those that do not. 

Importantly, bank holding company size matters in this case because it is 

associated with bond issue size, which we control for, not because it is 

associated with investors’ beliefs about government rescues.

In general, our estimates of the impact of size on bond funding costs may 

reflect a relationship between size, credit risk, or other explanatory 

variables and the part of bond funding costs that is not explained by our 

model (endogeneity). This could occur if any of our control variables are 

influenced by bond funding costs. In this case, our estimates of the 

magnitude of the association between size and bond funding costs will be 

imperfect and our ability to infer a causal relationship between size and 

bond funding costs will be limited.

Historical estimates of differences in bond funding costs for bank holding 

companies of different sizes are not indicative of future differences. As we 

have discussed, our estimates of the historical relationship between bank 

holding company size and bond funding costs vary from year to year. 

Thus, it is likely that the relationship between bond funding costs and 

bank holding company size may change in the future. As we have noted, 

the Dodd-Frank Act imposes new and higher fees on large bank holding 

companies and requires the Federal Reserve Board to subject large bank 

holding companies to enhanced regulatory standards for capital, liquidity, 

and risk management. These enhanced standards may help to reduce 

the likelihood that a large bank holding company will fail, which may in 

turn alter investors’ beliefs about the likelihood of government support 

and thus affect the size of any differences in yield spreads on bonds 

issued by large and small bank holding companies. Improvements in 

economic conditions, such as faster economic growth and lower 
Page 58 GAO-14-621 Large Bank Holding Companies 

unemployment, may have a similar effect. Finally, changes in the 

structure of financial markets, such as an increase in the share of credit 

provided by nonbank financial companies that reduces the systemic 

importance of large bank holding companies, could also lead investors to 

change their beliefs about government rescues in future episodes of 

individual or system-wide distress.

Finally, our estimates of the differences in bond funding costs for bank 

holding companies of different sizes do not necessarily reflect the harm 

that the failure of a large bank holding company could do to the economy. 

Bond funding costs reflect the risk that a bank holding company might fail 

and not be able to fully repay its investors. However, parties other than 

investors may be harmed if a bank holding company fails. For example, 

the customers of a failed bank holding company may be harmed if they 

have less access to credit or to specialized services provided by the bank 

holding company, which could be the case if the bank holding company 

has a large enough share of the market.

We made copies of the draft report available to FDIC, the Federal 

Reserve Board, FSOC, OCC and Treasury for their review and comment. 

We also provided excerpts of the draft report for technical comment to 

Fitch, Moody’s, Standard and Poor’s, and the International Monetary 

Fund. All of these agencies and third parties, except for FSOC, provided 

technical comments, which we have incorporated, as appropriate.

In its written comments, which are reprinted in appendix II, Treasury 

generally agreed with the results of our analysis and commented that our 

draft report represents a meaningful contribution to the literature. 

Treasury further commented that the Dodd-Frank Act makes clear that 

shareholders, creditors and executives—not taxpayers—will be 

responsible if a large company fails and that our results reflect increased 

market recognition that the Dodd-Frank Act ended “too big to fail” as a 

matter of law. While our results do suggest bond funding cost differences 

between large and smaller bank holding companies may have declined or 

reversed since the 2007-2009 financial crisis, we also report that a higher 

credit risk environment could be associated with lower bond funding costs 

for large bank holding companies than for small ones. Furthermore, as we 

have noted, many market participants we spoke with believe that recent 

regulatory reforms have reduced but not eliminated the perception of “too 

big to fail” and both they and Treasury officials indicated that additional 

steps were required to address “too big to fail.” As discussed in the final 

section of our report on page 56, changes over time in our estimates of 

Agency Comments 

and Our Evaluation
Page 59 GAO-14-621 Large Bank Holding Companies 

the relationship between bond funding costs and size may reflect 

changes in one or more components of investors’ beliefs about 

government support—such as their views on the likelihood that a bank 

holding company will fail and the likelihood it will be rescued if it fails—but 

we cannot precisely identify the influence of each of these components 

with certainty. A decline or reversal of funding cost advantages for large 

bank holding companies could indicate that investors believe that the 

government has become less likely to rescue a large bank holding 

company if it fails or more likely to impose losses on investors in a 

rescue. This trend could also indicate that investors believe that large 

bank holding companies are less likely to fail.

On separate dates in July 2014, Treasury, the Federal Reserve Board, 

OCC and FDIC provided via email technical comments related to the draft 

report’s analysis of funding cost differences between large and small 

bank holding companies. We summarize their most significant comments 

and our responses below.

• Treasury provided comments on our presentation of the impact of 

a higher credit risk environment on our analysis of bond funding 

costs and the statistical robustness of these results. In response 

to these comments, we revised text on the Highlights and in the 

report body to clarify that the results of this analysis reflect 

hypothetical scenarios and to provide greater attention to the 

potential impacts of regulatory reforms. With respect to the 

statistical robustness of these results, we note that the draft report 

contained clear information about the statistical significance of our 

results. Importantly, we note that whether one considers the 

estimates from all 42 models for 2013 or only the 10 models with 

statistically significant results, higher credit risk substantially 

increases (1) the number of models that suggest bond funding 

costs would have been lower for the largest bank holding 

companies than for smaller bank holding companies and (2) the 

size of funding cost differences in 2013. In addition, we amended 

the draft to clarify that our results for the hypothetical scenario for 

2013 differ from our results for 2008, in which all 42 models 

predicted lower funding costs for larger bank holding companies.

• Treasury and the Federal Reserve Board provided comments 

related to the draft report’s presentation of statistical significance 

in figures 1, 2, and 3. In response to these comments, we made 

formatting changes to the figures to more clearly differentiate 

estimates that are statistically significant from those that are not. 
Page 60 GAO-14-621 Large Bank Holding Companies 

In addition, we note that table 7 on pages 79-81 of the report 

contains some of the data used to create figures 1, 2 and 3 and 

differentiates between estimates that are statistically significant at 

the 1 percent, 5 percent, and 10 percent levels. Finally, while 

statistically insignificant estimates may be viewed as weaker 

evidence than statistically significant estimates and may influence 

how our results are interpreted, we note that statistical 

significance is not the only relevant characteristic of an 

econometric estimate and that by presenting the full range of 

results one can better assess their magnitude and economic 

significance. 

• Treasury and the Federal Reserve Board also commented that in 

comparing bond funding costs for large and small bank holding 

companies, a bank holding company with $10 billion in assets is 

too small to make a meaningful comparison to a bank holding 

company with $1 trillion in assets. They commented that a bank 

holding company with at least $50 billion in assets would provide a 

more relevant comparison for this analysis. While we agree that 

bank holding companies with $50 billion in assets may be more 

similar to $1 trillion bank holding companies than bank holding 

companies with $10 billion in assets, we used a smaller size for 

small bank holding companies because bank holding companies 

with $50 billion or more in assets may be viewed by investors as 

“large” and systemically important, in part because $50 billion in 

assets is the size threshold for Dodd-Frank Act requirements 

related to enhanced regulatory standards. While we agree that 

bank holding companies of different sizes have different 

characteristics, we compared estimated funding costs for bank 

holding companies assuming their credit risk and other 

characteristics are identical. Finally, increasing the size of the 

small bank holding company in our comparisons would not have a 

substantive impact on the sign or statistical significance of our

estimated differences in funding costs, nor would it change the 

trends in estimated differences in funding costs over time.

• The Federal Reserve Board and OCC commented that few of the 

estimated coefficients on the variables measuring size and size 

interacted with credit risk reported in table 5 were individually 

statistically significant, suggesting that there is little statistical 

evidence of a relationship between bond funding costs and size. 

To address this concern, we conducted hypothesis tests that the 

coefficients on the size and size-credit risk interaction terms are 
Page 61 GAO-14-621 Large Bank Holding Companies 

jointly equal to zero. The results of these hypothesis tests suggest 

that the coefficients on the size and size-credit risk interaction 

terms are jointly significant at the 5 percent level, suggesting that 

there is statistical evidence of a relationship between bond funding 

costs and size. We report the results of our joint hypothesis tests 

in table 5 on pages 74 and 76 of the report. In addition, we note 

that the draft report only contains coefficient estimates for the 6

baseline models of the 42 total models for 2008 and 2013 and that 

those 6 models are presented as examples and do not fully reflect 

the impact of size in all the specifications in those years or in other 

years. However, we believe the regression-level detail on the 6 

baseline models included in the report is sufficient to assist 

readers looking to understand our methodology and conclusions.

• OCC suggested that selection bias and omitted variables bias 

could reduce the validity of our econometric results. We agree that 

these biases are potential limitations of the model and are among 

the reasons the results should be interpreted with caution. We 

discuss the potential impact of these concerns on pages 56-57.

• OCC and FDIC commented on the endogeneity of some 

independent variables and the impact this could have on our 

results. We agree that endogeneity is a potential limitation of the 

model and is among the reasons the results should be interpreted 

with caution. In response to this comment, we added a paragraph 

discussing the potential impact of endogeneity on our results on 

page 57 of the report.

We are sending copies of this report to FDIC, the Federal Reserve Board, 

FSOC, OCC, Treasury, interested congressional committees, members, 

and others. In addition, the report is available at no charge on the GAO 

website at http://www.gao.gov.
Page 62 GAO-14-621 Large Bank Holding Companies 

If you or your staffs have any questions regarding this report, please 

contact me at (202) 512-4802 or EvansL@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix III.

Lawrance L. Evans, Jr., PhD

Director, Financial Markets

 and Community Investment
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 63 GAO-14-621 Large Bank Holding Companies 

To assess the extent to which the largest bank holding companies have 

received funding cost advantages as a result of perceptions that the 

government would not allow them to fail, we conducted an econometric 

analysis of the relationship between a bank holding company’s size or 

systemic importance and its funding costs. Bank holding companies 

obtain funds from investors—such as depositors, creditors, or 

shareholders—which they use to finance assets, such as various types of 

credit. The prices that bank holding companies pay to obtain these funds 

are influenced by several factors, including credit risk—the likelihood that 

bank holding companies will repay the funds they borrowed as agreed—

and other factors. Funding cost advantages may arise if investors believe 

that the government is more likely to support larger bank holding 

companies in distress than smaller bank holding companies in distress. 

This belief may lead investors to view larger bank holding companies as 

having less credit risk than smaller bank holding companies and thus 

charge larger bank holding companies a lower price to borrow than 

smaller bank holding companies.

We used a multivariate regression model to estimate the relationship 

between bank holding companies’ funding costs and their size while 

controlling for factors other than size that may also influence funding 

costs. Our general regression model is the following:

In this model, b denotes the bank holding company, q denotes the 

quarter, funding costbq is the bank holding company’s cost of funding in 

a quarter, sizebq is a measure of the bank holding company’s size at the 

beginning of the quarter, credit riskbq is a list of proxies for the bank 

holding company’s credit risk, Xbq is a list of other variables that may 

influence funding costs, εbq is an idiosyncratic error term, and α, β, γ, δ,

and Θ are parameters to be estimated. The parameter β captures the 

direct relationship between a bank holding company’s funding cost and its 

size. The parameter δ captures the indirect relationship between a bank 

holding company’s funding cost and its size that exists if the size of a 

bank holding company affects the relationship between its funding cost 

and credit risk. If greater values of the size measure are associated with 

larger bank holding companies, if greater values of the credit risk proxies 

Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large 

and Small Bank Holding Companies
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 64 GAO-14-621 Large Bank Holding Companies 

are associated with greater credit risk, and if investors view larger bank 

holding companies as less risky than smaller bank holding companies 

due to beliefs that the government is more likely to rescue larger bank 

holding companies in distress, then either β is less than zero, δ is less 

than zero, or both. However, the parameters β and δ may also reflect 

factors other than these beliefs.

We used a measure of funding costs based on bonds issued by bank 

holding companies that is available for bank holding companies with a 

wide variety of sizes. Bank holding companies use a variety of funding 

types from different sources, including various types of deposits, bonds, 

and equity. We used bond yield spreads—the difference between the rate 

of return on a bond and the rate of return on a Treasury bond of 

comparable maturity to measure a bank holding company’s cost of bond 

funding. Treasury securities are widely viewed as a risk-free asset, so the 

yield spread measures the price that investors charge a bank holding 

company to borrow to compensate them for credit risk and other factors. 

We focused on bond funding costs for several reasons. First, bonds are 

traded in secondary markets, so timely information about changes in their 

yield spreads, which reflect investors’ perceptions of the credit risk of the 

bond’s issuing bank holding company, is easily observable.1

 1

Secondary markets are markets where investors purchase securities or assets from other 

investors, rather than from issuing companies themselves.

In contrast, 

some uninsured deposit products are not traded in secondary markets, so 

changes in the prices of those deposits, which may reflect depositors’

perceptions of the riskiness of the bank holding company, may be less 

easy to observe. Second, bond yield spreads are a direct measure of 

bank holding companies’ funding costs. In contrast, credit ratings are 

indirect measures of bank holding companies’ funding costs because 

funding costs can vary for firms with the same rating. Similarly, total 

interest expense as reported on a bank holding company’s balance sheet 

is an imperfect measure of funding costs because total interest expense 

may aggregate the prices of liabilities with many important differences, 

including term and creditor priority. Third, bonds generally rank higher in a 

bank holding company’s capital structure than equity, so bondholders are 

less likely to suffer losses and more likely to be repaid if a bank holding 

company becomes distressed. Bondholders are thus more likely to 

benefit if a distressed bank holding company is rescued by the 

government. In contrast, equity holders generally rank lowest in a bank 

holding company’s capital structure and are the first to suffer losses if a 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 65 GAO-14-621 Large Bank Holding Companies 

bank holding company becomes distressed. Shareholders are thus the 

least likely to benefit if a distressed bank holding company is rescued by 

the government. It follows that the cost of bond funding is more likely to 

reflect investors’ beliefs about the likelihood of government support than 

the cost of equity funding. Fourth, bank holding companies with a wide 

variety of sizes issue bonds, including some with less than $10 billion in 

assets. In contrast, credit default swaps—the prices of which likely reflect 

perceptions of a bank holding company’s credit risk—are available for 

only a small number of large bank holding companies.2

We used Bloomberg to identify U.S. bank holding companies with more 

than $500 million in assets that were active in one or more years from 

2006 to 2013, and to identify all plain vanilla, fixed-rate, senior unsecured 

bonds issued by these bank holding companies, excluding bonds with a 

government guarantee.3 See table 3 for the numbers of bank holding 

companies and bonds we analyzed.4

Table 3: Numbers of Bank Holding Companies and Bonds, 2006-2013

Year

Number of bank holding 

companies

Number of bank holding companies 

with senior unsecured bonds 

outstanding

Number of senior unsecured bonds 

outstanding

2006 1178 22 166

2007 1209 23 202

2008 1192 22 203

 2

A credit default swap is a credit derivative in which two parties enter into an agreement 

whereby one party pays the other a fixed periodic coupon for the specified life of the 

agreement and the other party makes no payments unless a credit event relating to a 

predetermined reference asset occurs. If such an event occurs, the party will then make a 

payment to the first party and the swap will terminate. The size of the payment is usually 

linked to the decline in the reference asset’s market value following the determination of 

the occurrence of a credit event.

3

A plain vanilla bond, also known as a straight bond, is a bond that pays interest at regular 

intervals and at maturity pays back the principal that was originally invested. These bonds 

are debt instruments because they are essentially loaning money (creating debt) to an 

entity, which promises to pay the interest on the debt and at maturity pay back the original 

loan.

4

Our sample includes only bank holding companies, so it excludes companies like 

Goldman Sachs and Morgan Stanley before they became bank holding companies. 

Similarly, our sample excludes other financial companies that were never bank holding 

companies.
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 66 GAO-14-621 Large Bank Holding Companies 

Year

Number of bank holding 

companies

Number of bank holding companies 

with senior unsecured bonds 

outstanding

Number of senior unsecured bonds 

outstanding

2009 1178 26 333

2010 1133 29 368

2011 1038 29 374

2012 1046 31 447

2013 1033 30 510

Source: GAO analysis of Bloomberg data. | GAO-14-621

Notes: We used Bloomberg to identify U.S. bank holding companies that reported positive average 

assets as of the end of at least one year from 2006 to 2013, where average assets consist of the 

quarterly average for total assets, less goodwill, other disallowed intangible assets, disallowed 

deferred tax assets, and any other assets that are deducted in determining Tier 1 capital in 

accordance with the capital standards issued by the reporting bank’s primary federal supervisory 

authority and are reported on form FR Y-9C. Only bank holding companies with $500 million in assets 

or more are required to file form FR Y-9C. We also used Bloomberg to identify all plain vanilla, fixedrate, senior unsecured bonds issued by these bank holding companies, where “plain vanilla” bonds 

are bonds without any derivative or equity features. We excluded bonds guaranteed by either the 

Federal Deposit Insurance Corporation (FDIC) or the U.S. government.

We collected data on bond yield spreads, bank holding company size, 

other variables associated with bank holding company credit risk, and 

bond characteristics from Bloomberg and used these data to assemble a 

dataset with one observation for each bond in each quarter from the first 

quarter of 2006 to the fourth quarter of 2013.

Yield spreads. For each bond, we collected daily data on its yield spread 

based on prices from executed trades, executable quotes, and 

composites derived from executable and indicative quotes.5 For each 

bond and for each quarter from 2006 to 2013, we calculated the average 

yield spread for each bond based on (1) executed trades, executable 

quotes, and composites derived from executable and indicative quotes; 

and (2) actual trades only.6

Size. We constructed four alternative indicators of a bank holding 

company’s size or systemic importance: (1) total assets as of the 

 5

Executed trades are trades that have been completed. Executable quotes are quotes 

provided by bond dealers at which they are willing to trade. Indicative quotes are quotes 

provided by bond dealers to give an indication of the price at which a bond might trade, 

but at which they are not obligated to trade. Composites are aggregates of quotes from 

multiple sources that are suggestive of the price at which a bond might trade.

6

The correlation between the two measures of bond yield spreads was 0.96. 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 67 GAO-14-621 Large Bank Holding Companies 

beginning of the quarter; (2) an indicator for whether or not a bank holding 

company had $50 billion or more in assets, i.e., is a systemically 

important financial institution (SIFI), as of the beginning of the quarter, 

which captures those bank holding companies that are subject to 

enhanced prudential standards under the Dodd-Frank Wall Street Reform 

and Consumer Protection Act (Dodd-Frank Act); (3) an indicator for 

whether or not the Financial Stability Board designated a bank holding 

company a global systemically important bank (GSIB) in November 2013 

based on its size, interconnectedness, lack of readily available substitutes 

or financial institution infrastructure, global (cross-jurisdictional) activity, 

and complexity; and (4) total assets and total assets squared.7

Credit risk. For each bank holding company, we constructed several 

indicators of credit risk, including indicators of capital adequacy, asset 

quality, earnings, maturity mismatch, and volatility.8

• Capital adequacy. Capital absorbs losses, promotes public 

confidence, helps restrict excessive asset growth, and provides 

protection to creditors. We constructed two alternative sets of 

indicators of capital adequacy: (1) equity capital and subordinated 

debt as percentages of assets as of the beginning of the quarter, and 

(2) equity capital and subordinated debt as percentages of riskweighted assets as of the beginning of the quarter.

• Asset quality. Asset quality reflects the quantity of existing and 

potential credit risk associated with a bank holding company’s loan 

and investment portfolios and other assets, as well as off-balance 

sheet transactions. It also reflects the ability of management to 

identify and manage credit risk. We used the Texas ratio—

nonperforming assets as a percentage of tangible common equity 

plus loan loss reserves—as of the beginning of the quarter as an 

 7

A bank holding company’s total assets may change from one quarter to the next. 

Similarly, a bank holding company may have less than $50 billion in assets in some 

quarters and more than $50 billion in assets in others. An alternative measure of a bank 

holding company’s size or systemic importance is whether or not it participated in the 

Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR). However, the 

measure of size based on CCAR participation is highly correlated with the measure of size 

based on whether or not a bank holding company had $50 billion or more in assets, so 

these two measures of size are not substantively different.

8

Credit risk increases with higher values of our asset quality, maturity mismatch, and 

volatility measures and with lower values of our capital adequacy and earnings measures.
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 68 GAO-14-621 Large Bank Holding Companies 

indicator of asset quality, where nonperforming assets include assets 

in nonaccrual status, other real estate owned, restructured loans, and 

restructured loans in compliance and tangible common equity is total 

capital minus perpetual preferred stock minus goodwill and other 

intangibles. The Texas ratio can indicate a bank holding company’s 

likelihood of failure by comparing its troubled loans to its capital. The 

higher the ratio, the more likely the institution is to fail because more 

of its capital could be eroded by realized losses on these troubled 

loans.

• Earnings. Earnings are the initial safeguard against the risks of 

engaging in the banking business and represent the first line of 

defense against capital depletion that can result from declining asset 

values. We used net income as a percentage of assets as of the 

beginning of the quarter as an indicator of earnings.

• Maturity mismatch. Maturity mismatch reflects a bank holding 

company’s ability to obtain funds at a reasonable price within a 

reasonable time period to meet obligations as they come due. We 

used the difference between volatile liabilities—liabilities that may 

quickly or unexpectedly come due–and liquid assets—assets that can 

easily be converted to cash to cover liabilities—as a percentage of 

total liabilities as of the beginning of each quarter as an indicator of 

maturity mismatch. Volatile liabilities include federal funds purchased 

and repurchase agreements, trading liabilities, other borrowed funds, 

foreign deposits, and jumbo deposits less derivatives with negative 

fair value. Liquid assets include cash, securities, federal funds sold 

and reverse repurchase agreements, and trading assets less pledged 

securities.9

• Volatility. Volatility reflects how much the value of a bank holding 

company fluctuates over a given amount of time and the possibility 

that the value will fall below a given threshold for default. We 

constructed five alternative indicators of volatility: (1) the standard 

deviation of equity prices over the quarter, (2) option implied volatility 

for the quarter, (3) the standard deviation of equity returns over the 

quarter, (4) the standard deviation of excess equity returns over the 

 9

Several components of volatile liabilities, such as federal funds purchased, repurchase 

agreements, and demand deposits, have relatively short maturities and may not be rolled 

over by the creditor when they mature. Maturity mismatch measures the bank holding 

company’s capacity to cover these liabilities if the creditor chooses to not roll them over. 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 69 GAO-14-621 Large Bank Holding Companies 

quarter, and (5) the standard deviation of earnings over the past 16 

quarters as alternative indicators of volatility.

Other factors. We also collected data on several other factors that may 

influence bond yield spreads, including bonds’ coupon rates, times to 

maturity, and liquidity, and bank holding companies’ operating expenses. 

We used three alternative indicators of a bond’s liquidity: (1) issue size, 

(2) total volume traded during a quarter, and (3) average bid-ask spread 

over a quarter.10 Finally, we used a bank holding company’s noninterest 

expenses as a percentage of total assets as an indicator of its operating 

expenses.11

Table 4: Summary Statistics for Bank Holding Companies and Bonds Analyzed, 2008 and 2013

Table 4 shows summary statistics for bank holding 

companies with senior unsecured bonds outstanding in 2008 and 2013 

and for senior unsecured bonds outstanding in 2008 and 2013.

Mean

Standard 

deviation Minimum Maximum

Bank holding companies with senior unsecured bonds outstanding, 2008

Total assets (dollars in billions) 403.974 640.816 7.685 2134.499

Operating expense/assets (%) 1.067 0.801 0.576 4.451

Equity capital/assets (%) 10.602 5.226 5.916 31.332

Equity capital/risk-weighted assets (%) 14.340 9.326 7.688 52.366

Subordinated debt/assets (%) 3.308 1.353 0 6.010

Subordinated debt/risk-weighted assets (%) 4.157 1.412 0 6.364

Earnings/assets (%) 0.110 0.440 -1.032 1.349

Maturity mismatch (%) 17.869 18.000 -53.133 34.162

Texas ratio (%) 16.287 10.946 0.011 40.211

Equity price volatility (%) 88.156 31.924 48.106 180.773

 10The bid-ask spread is the difference between the best buying price and the best selling 

price. We expressed the bid-ask spread as a percentage of the midpoint between the bid 

price and the ask price.

11Some studies suggest that there may be economies of scale or scope in banking. For 

example, see Joseph P. Hughes and Loretta J. Mester, “Who Said Large Banks Don’t 

Experience Scale Economies? Evidence From a Risk-Return-Driven Cost Function,”

Journal of Financial Intermediation 22 (2013), pp. 559-585. We include noninterest 

expense as a percentage of total assets to control for a channel through which economies 

of scale may affect bond funding costs. Other channels through which economies of scale 

or scope may affect bond funding costs are profitability, which is captured in our earnings 

variable, and riskiness, which is captured in our volatility variable.
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 70 GAO-14-621 Large Bank Holding Companies 

Mean

Standard 

deviation Minimum Maximum

Option implied volatility (%) 66.246 14.459 43.573 97.816

Equity return volatility (%) 5.079 0.899 3.508 6.962

Excess equity return volatility (%) 3.723 0.969 2.231 5.817

Earnings volatility (%) 6.108 4.353 0.460 23.510

GSIB designation (indicator) 0.273 —- 0 1

Assets $50 billion or more (indicator) 0.818 —- 0 1

Senior unsecured bonds outstanding, 2008

Average bond yield spread calculated using prices from executed 

trades, executable quotes, and composites of executable and 

indicative quotes (bps)

456.407 305.194 15.066 1479.019

Average bond yield spread calculated using prices from executed 

trades (bps)

474.809 342.013 15.066 1479.019

Bond issue size (dollars in millions) 1004.746 1028.839 0.143 5500.000

Total trade volume (dollars in millions) 160456.800 225838.100 0 1663766.000

Average bid-ask spread, all pricing sources (%) 1.535 1.621 0.0156 14.224

Time to maturity (quarters) 17.177 19.706 0 119.000

Coupon (%) 5.461 1.219 2.000 12.500

Bank holding companies with senior unsecured bonds outstanding, 

2013

Total assets (dollars in billions) 413.488 672.505 4.563 2412.823

Operating expense/assets (%) 0.986 0.598 0.613 3.899

Equity capital/assets (%) 10.993 2.375 7.207 19.144

Equity capital/risk-weighted assets (%) 16.206 4.358 10.676 31.576

Subordinated debt/assets (%) 1.602 0.996 0 4.137

Subordinated debt/risk-weighted assets (%) 2.402 1.205 0 5.171

Earnings/assets (%) 0.280 0.150 0.040 0.766

Maturity mismatch (%) -1.044 20.512 -53.133 47.001

Texas ratio (%) 17.523 12.061 0.812 38.690

Equity price volatility (%) 20.629 3.280 12.952 28.572

Option implied volatility (%) 23.996 3.656 15.788 30.250

Equity return volatility (%) 1.311 0.202 0.828 1.758

Excess equity return volatility (%) 1.003 0.200 0.630 1.478

Earnings volatility (%) 3.936 4.771 0.355 23.510

GSIB designation (indicator) 0.267 —- 0 1

Assets $50 billion or more (indicator) 0.700 —- 0 1

Senior unsecured bonds outstanding, 2013
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 71 GAO-14-621 Large Bank Holding Companies 

Mean

Standard 

deviation Minimum Maximum

Average bond yield spread calculated using prices from executed 

trades, executable quotes, and composites of executable and 

indicative quotes (bps)

140.684 69.252 15.066 500.750

Average bond yield spread calculated using prices from executed 

trades (bps)

132.952 71.563 15.066 796.406

Bond issue size (dollars in millions) 1042.622 1107.804 0.350 5500.000

Total trade volume (dollars in millions) 161367.900 293879.200 0 33334868.000

Average bid-ask spread, all pricing sources (%) 0.537 0.474 0.003 2.819

Time to maturity (quarters) 24.548 24.729 0 126.000

Coupon (%) 4.320 1.712 0.800 10.000

Source: GAO analysis of Bloomberg and Financial Stability Board data. | GAO-14-621

We estimated a variety of models for each year from 2006 to 2013 to 

address uncertainty about how to appropriately control for bond liquidity, 

bank holding company credit risk, and the size or systemic importance of 

a bank holding company and also to allow the relationship between bank 

holding company size and bond funding costs to vary over time. In our 

baseline specifications, we measured bond funding costs using average 

yield spreads on senior unsecured bonds based on executed trades, 

executable quotes, and composites derived from executable and 

indicative quotes; size using total assets; capital adequacy using equity 

capital and subordinated debt as percentages of total assets; and bond 

liquidity using issue size and total volume. We estimated the parameters 

for each year and for each of our five volatility variables, as well as for 

each year without controlling for volatility. We also estimated the 

parameters of the following variations of the baseline specifications for 

senior unsecured bonds:

• Bid-ask specification. We measured bond liquidity using issue size, 

total volume, and average bid-ask spread.

• Trade Reporting and Compliance Engine specification. We 

measured bond funding costs using average yield spreads based only 

on actual trades reported in the Trade Reporting and Compliance 

Engine database.

• Risk-weighted assets specification. We measured capital 

adequacy using equity capital and subordinated debt as percentages 

of risk-weighted assets.

• GSIB specification. We measured size using the indicator for 

whether or not a bank holding company was designated a GSIB in 

November 2013.
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 72 GAO-14-621 Large Bank Holding Companies 

• Systemically important financial institution (SIFI) specification. 

We measured size using the indicator for whether or not a bank 

holding company had $50 billion or more in assets.

• Total assets and total assets squared specification. We measured 

size using both total assets and the square of total assets.

Altogether, we estimated the parameters of 42 separate specifications for 

each year from 2006 to 2013. For all specifications, we included 

indicators for each quarter to control for the influence on yield spreads of 

economic conditions, the regulatory environment, and other factors that 

vary over time but not across bank holding companies. We also adjusted 

the standard errors of our parameter estimates to allow for the possibility 

that they are not identically distributed and to allow for arbitrary 

correlation between observations on bonds issued by the same bank 

holding company. Table 5 shows the estimates of the parameters for our 

baseline regressions for 2008 and 2013.

Table 5: Parameter Estimates for Baseline Regressions, 2008 and 2013

Dependent variable = average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes (basis points)

2008 Volatility variable

Equity price 

volatility

Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings 

volatility

No volatility 

variable

Time to maturity -1.269*

(0.614)

-1.187*

(0.641)

-1.255*

(0.606)

-1.255*

(0.611)

-1.232**

(0.570)

-1.267**

(0.590)

Coupon 30.982

(20.589)

29.042

(21.853)

30.547

(20.257)

30.517

(20.379)

29.479

(19.355)

29.876

(20.006)

Operating expenses -92.810**

(37.956)

-202.517***

(60.420)

-89.526**

(36.812)

-70.820*

(35.180)

-138.984**

(55.786)

-111.772***

(34.104)

Issue size 0.000

(0.023)

0.004

(0.024)

0.000

(0.023)

0.003

(0.023)

0.002

(0.022)

-0.000

(0.022)

Total trade volume -0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

-0.000

(0.000)

Total assets 0.124

(0.144)

0.064

(0.139)

0.124

(0.129)

0.130

(0.104)

0.055

(0.133)

0.063

(0.129)

Equity capital 19.526**

(6.944)

23.180**

(10.197)

18.946**

(7.655)

17.337**

(6.725)

18.710**

(8.084)

19.686***

(6.863)

Equity capital x total assets 0.013

(0.023)

-0.022

(0.026)

0.012

(0.024)

0.017

(0.018)

0.021

(0.020)

0.020

(0.021)
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 73 GAO-14-621 Large Bank Holding Companies 

Dependent variable = average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes (basis points)

Subordinated debt 7.918

(31.859)

14.153

(29.805)

6.180

(31.162)

0.322

(26.788)

10.856

(29.995)

11.004

(32.695)

Subordinated debt x total 

assets

-0.099

(0.065)

-0.025

(0.046)

-0.090

(0.065)

-0.092*

(0.053)

-0.108

(0.064)

-0.103

(0.065)

Earnings -167.831*

(96.274)

-108.627

(97.037)

-143.709

(99.636)

-146.072

(84.756)

-177.705

(108.083)

-163.593*

(93.830)

Earnings x total assets 0.068

(0.138)

0.169

(0.138)

0.045

(0.130)

0.060

(0.106)

-0.000

(0.130)

0.013

(0.125)

Maturity mismatch -5.968**

(2.466)

-8.608***

(2.105)

-5.385**

(2.422)

-4.915**

(2.181)

-7.370***

(2.349)

-6.829**

(2.535)

Maturity mismatch x total 

assets

0.003

(0.002)

0.007***

(0.002)

0.003

(0.002)

0.002

(0.002)

-0.001

(0.003)

0.003

(0.002)

Texas ratio 6.512*

(3.526)

0.258

(1.979)

6.320*

(3.453)

4.985

(3.813)

7.060*

(3.514)

7.531*

(3.615)

Texas ratio x total assets -0.002

(0.002)

-0.000

(0.001)

-0.002

(0.002)

-0.002

(0.002)

-0.002

(0.002)

-0.003

(0.002)

Equity price volatility 0.586

(0.396)

Equity price volatility x total 

assets

-0.000

(0.000)

Option implied volatility 1.696

(1.463)

Option implied volatility x total 

assets

0.000

(0.001)

Equity return volatility 34.178*

(17.628)

Equity return volatility x total 

assets

-0.005

(0.010)

Excess equity return volatility 48.818**

(18.522)

Excess equity return volatility x 

total assets

-0.017*

(0.009)

Earnings volatility 7.787

(10.992)

Earnings volatility x total 

assets

0.014

(0.011)
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 74 GAO-14-621 Large Bank Holding Companies 

Dependent variable = average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes (basis points)

Number of observations 478 428 478 478 478 478

Adjusted R-squared 0.628 0.606 0.631 0.638 0.624 0.622

Akaike Information Criteria 5917 5254 5913 5904 5922 5927

Schwartz Information Criteria 6000 5323 5997 5988 6005 6010

Number of bank holding 

companies

21 18 21 21 21 21

Hypothesis test that the 

coefficients on total assets and the 

total assets-credit risk interaction 

terms are jointly equal to zero:

F-statistic 3.579 3.792 2.972 4.486 2.983 4.207

Probability of observing F-statistic 

if hypothesis is true

0.012 0.012 0.026 0.004 0.026 0.007

2013 Volatility variable

Equity price 

volatility

Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings 

volatility

No volatility 

variable

Time to maturity 0.788***

(0.093)

0.775***

(0.087)

0.794***

(0.095)

0.798***

(0.095)

0.857***

(0.120)

0.878***

(0.128)

Coupon 9.497***

(2.079)

8.455***

(1.742)

9.453***

(2.047)

9.197***

(1.926)

8.396***

(2.459)

10.085***

(2.511)

Operating expenses 5.749

(8.154)

0.972

(6.588)

6.741

(8.190)

7.736

(8.433)

-10.274**

(4.296)

-13.639**

(5.668)

Issue size -0.013***

(0.004)

-0.010**

(0.004)

-0.013***

(0.004)

-0.013***

(0.004)

-0.013***

(0.004)

-0.016***

(0.004)

Total trade volume 0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

0.000

(0.000)

Total assets 0.013

(0.032)

0.017

(0.022)

0.010

(0.034)

0.013

(0.033)

0.269***

(0.077)

-0.037

(0.048)

Equity capital 6.763*

(3.856)

7.444**

(3.428)

6.072

(3.923)

3.375

(3.965)

5.487

(3.716)

0.470

(4.559)

Equity capital x total assets -0.005

(0.005)

-0.009*

(0.005)

-0.004

(0.005)

-0.002

(0.005)

-0.011

(0.007)

0.012**

(0.005)

Subordinated debt -29.137**

(13.149)

-29.108***

(9.968)

-29.921**

(13.257)

-31.370**

(13.438)

-19.769

(16.353)

-25.283*

(14.168)

Subordinated debt x total 

assets

0.052**

(0.019)

0.057***

(0.017)

0.054**

(0.020)

0.057**

(0.021)

0.065*

(0.033)

0.030

(0.023)

Earnings -69.186

(49.502)

-44.545

(44.445)

-71.544

(49.088)

-74.556

(47.102)

-32.870*

(17.759)

-48.299**

(21.803)
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 75 GAO-14-621 Large Bank Holding Companies 

Dependent variable = average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes (basis points)

Earnings x total assets 0.027

(0.041)

0.044

(0.028)

0.026

(0.042)

0.018

(0.038)

-0.070***

(0.022)

-0.048

(0.034)

Maturity mismatch 0.522

(0.695)

1.136*

(0.593)

0.559

(0.714)

0.555

(0.706)

1.062

(0.779)

2.244***

(0.531)

Maturity mismatch x total 

assets

-0.001*

(0.001)

-0.001***

(0.000)

-0.001*

(0.001)

-0.001

(0.001)

-0.002*

(0.001)

-0.003***

(0.001)

Texas ratio 3.207***

(1.114)

2.961***

(0.933)

3.270***

(1.108)

2.826**

(1.055)

4.106***

(1.463)

3.447**

(1.464)

Texas ratio x total assets -0.003***

(0.001)

-0.003***

(0.001)

-0.003***

(0.001)

-0.004***

(0.001)

-0.008***

(0.002)

-0.006***

(0.001)

Equity price volatility 5.959***

(1.434)

Equity price volatility x total 

assets

0.000

(0.001)

Option implied volatility 9.397***

(1.818)

Option implied volatility x total 

assets

0.000

(0.001)

Equity return volatility 98.615***

(25.234)

Equity return volatility x total 

assets

-0.001

(0.014)

Excess equity return volatility 124.829***

(32.956)

Excess equity return volatility x 

total assets

-0.020

(0.017)

Earnings volatility 12.388***

(3.559)

Earnings volatility x total 

assets

-0.029***

(0.007)

Number of observations 1446 1446 1446 1446 1535 1535

Adjusted R-squared 0.521 0.563 0.519 0.519 0.521 0.469

Akaike Information Criteria 15083 14951 15090 15090 16221 16378

Schwartz Information Criteria 15199 15067 15206 15206 16338 16484

Number of bank holding 

companies

30 30 30 30 31 31
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 76 GAO-14-621 Large Bank Holding Companies 

Dependent variable = average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes (basis points)

Hypothesis test that the 

coefficients on total assets and 

the total assets-credit risk 

interaction terms are jointly 

equal to zero: 

F-statistic 3.027 3.907 3.009 4.477 7.309 5.258

Probability of observing Fstatistic if hypothesis is true0.016 0.004 0.017 0.002 <0.001 0.001

Source: GAO analysis of Bloomberg and Financial Stability Board data. | GAO-14-621

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated multiple models for each year from 2006 through 2013 to assess the sensitivity of our 

results to alternative measures of capital adequacy, volatility, bond liquidity, and size or systemic 

importance. This table shows estimates of the parameters of models for 2008 and 2013 that used 

average bond yield spreads calculated using prices from executed trades, executable quotes, and 

composites of executable and indicative quotes to measure bond funding costs; total assets to 

measure bank holding company size; issue size and total trade volume to measure bond liquidity; 

equity capital and subordinated debt as percents of assets to measure capital adequacy; and each of 

equity price volatility, option implied volatility, equity return volatility, excess equity return volatility, 

and earnings volatility to measure volatility, as well as a model with no volatility measure. Other 

explanatory variables include coupon, time to maturity, Texas ratio, maturity mismatch, and operating 

expenses. Standard errors clustered by bank holding company are in parentheses. *=statistically 

significant at the 10 percent level. **=statistically significant at the 5 percent level. ***=statistically 

significant at the 1 percent level.

Our econometric models allow the size of a bank holding company to 

influence its bond yield spreads both directly and indirectly through the 

relationships between yield spreads and each indicator of credit risk, i.e., 

through the interaction term. To summarize the overall relationship 

between yield spreads and size reflected in each specification, we 

predicted yield spreads on senior unsecured bonds for bank holding 

companies of different sizes and credit risk levels using our estimates of 

the parameters for each specification for each year. Specifically, for each 

year, we predicted bond yield spreads for bank holding companies with 

$10 billion, $50 billion, $100 billion, $250 billion, $500 billion, and $1 

trillion in assets assuming that all bank holding companies had the 

average level of credit risk each year, a low level of credit risk each year, 

a high level of credit risk each year, and the average level of credit risk for 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 77 GAO-14-621 Large Bank Holding Companies 

2008.12

Table 6: Baseline Comparisons of Bond Yield Spreads for Bank Holding Companies of Different Sizes by Year, 2008 and 2013

(basis points)

Table 6 shows all of the differences between predicted bond yield 

spreads for bank holding companies with $50 billion, $100 billion, $250 

billion, $500 billion, and $1 trillion in assets and predicted bond yield 

spreads for bank holding companies with $10 billion in assets for our 

baseline regressions for 2008 and 2013 assuming bank holding 

companies have the average level of credit risk each year.

2008, credit risk equal to 

average for 2008 Comparison from baseline model with volatility variable:

Comparison

Equity price volatility Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings 

volatility

No volatility 

variable

$50 billion vs. $10 billion in 

assets

-3.860*** -1.867** -4.124*** -3.590*** -4.353*** -4.011***

(1.175) (0.770) (1.186) (1.181) (1.235) (1.256)

$100 billion vs. $10 billion in 

assets

-8.686*** -4.201** -9.278*** -8.078*** -9.794*** -9.026***

(2.644) (1.734) (2.669) (2.658) (2.779) (2.827)

$250 billion vs. $10 billion in 

assets

-23.161*** -11.204** -24.742*** -21.541*** -26.119*** -24.069***

(7.050) (4.623) (7.118) (7.088) (7.410) (7.537)

$500 billion vs. $10 billion in 

assets

-47.288*** -22.874** -50.515*** -43.980*** -53.326*** -49.140***

(14.394) (9.439) (14.532) (14.471) (15.128) (15.389)

$1 trillion vs. $10 billion in 

assets

-95.541*** -46.215** -102.061*** -88.858*** -107.739*** -99.284***

(29.081) (19.070) (29.360) (29.237) (30.565) (31.092)

 12For predictions at average levels of credit risk, we set variables equal to the unweighted 

average for the sample used to estimate the regression for each year. For predictions at 

low levels of credit risk, we set variables measuring asset quality, maturity mismatch, and 

volatility equal to their 25th percentiles for each year and we set variables measuring 

capital adequacy and earnings equal to their 75th percentiles for each year. For predictions 

as high levels of credit risk, we set variables measuring asset quality, maturity mismatch, 

and volatility equal to their 75th percentiles for each year and we set variables measuring 

capital adequacy and earnings equal to their 25th percentiles for each year.
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 78 GAO-14-621 Large Bank Holding Companies 

2013, credit risk equal to 

average for 2013 Comparison from baseline model with volatility variable:

Comparison Equity price volatility Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings 

volatility

No volatility 

variable

$50 billion vs. $10 billion in 

assets

1.152** 1.011*** 1.239** 1.388*** 0.930 2.365***

(0.446) (0.365) (0.463) (0.498) (0.861) (0.727)

$100 billion vs. $10 billion in 

assets

2.591** 2.276*** 2.787** 3.123*** 2.093 5.322***

(1.004) (0.820) (1.042) (1.120) (1.936) (1.635)

$250 billion vs. $10 billion in 

assets

6.910** 6.068*** 7.432** 8.329*** 5.582 14.19***

(2.676) (2.187) (2.778) (2.985) (5.164) (4.359)

$500 billion vs. $10 billion in 

assets

14.107** 12.389*** 15.174** 17.006*** 11.397 28.977***

(5.464) (4.465) (5.673) (6.095) (10.542) (8.900)

$1 trillion vs. $10 billion in 

assets

28.502** 25.031*** 30.658** 34.358*** 23.027 58.546***

(11.039) (9.022) (11.461) (12.315) (21.30) (17.982)

2013, credit risk equal to 

average for 2008 Comparison from baseline model with volatility variable:

Comparison Equity price volatility Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings 

volatility

No volatility 

variable

$50 billion vs. $10 billion in 

assets

1.976

(3.253)

2.541

(2.414)

1.465

(2.899)

-0.639

(2.598)

-0.087

(1.704)

-1.971

(1.750)

$100 billion vs. $10 billion in 

assets

4.447

(7.319)

5.717

(5.431)

3.296

(6.523)

-1.437

(5.846)

-0.195

(3.835)

-4.435

(3.937)

$250 billion vs. $10 billion in 

assets

11.859

(19.517)

15.245

(14.483)

8.789

(17.395)

-3.833

(15.589)

-0.519

(10.226)

-11.828

(10.499)

$500 billion vs. $10 billion in 

assets

24.212

(39.848)

31.126

(29.570)

17.943

(35.514)

-7.826

(31.828)

-1.060

(20.879)

-24.148

(21.436)

$1 trillion vs. $10 billion in 

assets

48.918

(80.509)

62.888

(59.743)

36.253

(71.754)

-15.812

(64.305)

-2.142

(42.183)

-48.789

(43.309)

Source: GAO analysis of Bloomberg and Financial Stability Board data. | GAO-14-621

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated multiple models for each year from 2006 through 2013 to assess the sensitivity of 

estimated funding cost differences to alternative measures of capital adequacy, volatility, bond 

liquidity, and size or systemic importance and then used the models to compare bond funding costs 

for bank holding companies of different sizes but the same levels of credit risk, bond liquidity, and 

other characteristics. This table shows bond funding cost comparisons from models for 2008 and 

2013 that used average bond yield spreads calculated using prices from executed trades, executable 

quotes, and composites of executable and indicative quotes to measure bond funding costs; total 

assets to measure bank holding company size; issue size and total trade volume to measure bond 

liquidity; equity capital and subordinated debt as percents of assets to measure capital adequacy; and 

each of equity price volatility, option implied volatility, equity return volatility, excess equity return 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 79 GAO-14-621 Large Bank Holding Companies 

volatility, and earnings volatility to measure volatility, as well as a model with no volatility measure. 

Other explanatory variables include coupon, time to maturity, Texas ratio, maturity mismatch, and 

operating expenses. *=statistically significant at the 10 percent level. **=statistically significant at the 

5 percent level. ***=statistically significant at the 1 percent level.

Table 7 shows the difference in predicted bond yield spreads for bank 

holding companies with $1 trillion and $10 billion in assets for all 

specifications for 2008 and 2013 assuming bank holding companies have 

the average level of credit risk each year. Table 7 also shows the 

difference in predicted bond yield spreads for bank holding companies 

with $1 trillion and $10 billion in assets for all specifications for 2013 

assuming bank holding companies have the average level of credit risk in 

2008.

Table 7: Comparisons of Bond Yield Spreads for Bank Holding Companies with $1 trillion versus $10 billion in Assets, All 42 

Models, 2008 and 2013 (basis points)

2008, credit risk 

equal to average 

for 2008 Comparison from model with volatility variable:

Equity price 

volatility

Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings volatility No volatility 

variable

Baseline modela -95.54*** -46.22** -102.06*** -88.86*** -107.74*** -99.28***

(29.08) (19.07) (29.36) (29.24) (30.57) (31.09)

Add bid-ask 

spreads to bond 

liquidity measures

-98.52*** -21.30 -104.08*** -88.60** -106.98** -104.99**

(32.98) (15.94) (31.57) (32.09) (37.49) (37.40)

Measure size using 

GSIB designation

-148.78** -115.16*** -157.00** -143.10** -145.12** -148.98**

(60.01) (35.69) (60.78) (58.73) (55.21) (57.39)

Measure size using 

total assets and 

total assets 

squared

-382.78*** -629.74*** -422.24*** -270.29** -228.54* -291.43**

(119.13) (82.69) (101.56) (113.61) (127.27) (120.81)

Measure capital 

adequacy using 

equity capital and 

subordinated debt 

as percents of riskweighted assets

-86.43** -44.90 -96.96*** -77.63** -96.79*** -92.96**

(30.87) (32.54) (31.12) (29.26) (32.30) (34.10)

Measure size using 

an indicator of 

whether a bank 

holding company 

has assets of $50 

billion or more

-432.86*** -397.28** -420.42*** -357.57*** -515.38*** -357.49***

(90.04) (146.06) (67.65) (30.33) (133.82) (73.88)
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 80 GAO-14-621 Large Bank Holding Companies 

Measure bond yield 

spreads using 

prices from 

executed trades 

only

-79.73** -16.75 -89.17** -73.39** -93.21** -85.16**

(31.77) (20.62) (32.85) (32.98) (34.18) (35.49)

2013, credit risk 

equal to average 

for 2013 Comparison from model with volatility variable:

Equity price 

volatility

Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings volatility No volatility 

variable

Baseline modela 28.50** 25.03*** 30.66** 34.36*** 23.03 58.55***

(11.04) (9.02) (11.46) (12.31) (21.30) (17.98)

Add bid-ask 

spreads to bond 

liquidity measures

32.80*** 29.63*** 34.86*** 38.49*** 25.87 62.60***

(10.95) (8.431) (11.35) (12.41) (21.28) (17.88)

Measure size using 

GSIB designation

3.07 -11.18 7.49 28.13*** 36.07** 28.97

(11.43) (11.32) (11.10) (9.52) (14.40) (20.42)

Measure size using 

total assets and 

total assets 

squared

-51.80** -41.43** -52.43** -36.89 -19.01 3.73

(23.50) (18.95) (23.06) (22.97) (52.29) (43.74)

Measure capital 

adequacy using 

equity capital and 

subordinated debt 

as percents of riskweighted assets

23.17** 20.33** 24.33** 28.05** 0.264 45.88**

(10.53) (7.790) (11.00) (11.91) (15.62) (17.03)

Measure size using 

an indicator of 

whether a bank 

holding company 

has assets of $50 

billion or more

-183.08** -195.76*** -190.95** -160.67* -188.38*** -163.51

(81.39) (59.77) (80.21) (85.47) (66.17) (100.2)

Measure bond yield 

spreads using 

prices from 

executed trades 

only

17.32 13.21 20.06 24.87 13.39 49.02***

(14.24) (12.66) (14.78) (15.86) (25.28) (17.37)
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 81 GAO-14-621 Large Bank Holding Companies 

2013, credit risk 

equal to average 

for 2008 Comparison from model with volatility variable:

Equity price 

volatility

Option implied 

volatility

Equity return 

volatility

Excess equity 

return volatility

Earnings volatility No volatility 

variable

Baseline modela 48.92 62.89 36.25 -15.81 -2.14 -48.79

(80.51) (59.74) (71.75) (64.31) (42.18) (43.31)

Add bid-ask 

spreads to bond 

liquidity measures

64.91 86.12 51.00 3.65 -0.28 -43.14

(76.62) (54.27) (66.88) (62.80) (42.16) (44.27)

Measure size using 

GSIB designation

-290.72 -264.12** -266.26 -118.16 -41.328 28.798

(210.512) (103.19) (197.211) (184.807) (55.122) (54.296)

Measure size using 

total assets and 

total assets 

squared

-455.05 -327.16** -494.45* -473.93* -241.81 -160.75

(279.97) (141.48) (253.52) (242.11) (195.99) (153.44)

Measure capital 

adequacy using 

equity capital and 

subordinated debt 

as percents of riskweighted assets

-54.12 -7.73 -67.52 -102.48** -45.56 -105.58***

(68.63) (71.92) (58.98) (47.92) (35.37) (37.02)

Measure size using 

an indicator of 

whether a bank 

holding company 

has assets of $50 

billion or more

-194.56 -606.39* -373.43* -355.84*** -246.16* -154.46

(144.1) (307.14) (195.44) (107.35) (143.55) (144.58)

Measure bond yield 

spreads using 

prices from 

executed trades 

only

38.47 35.45 36.14 -1.00 12.43 -50.39

(87.83) (61.70) (75.85) (64.28) (35.46) (41.98)

Source: GAO analysis of Bloomberg and Financial Stability Board data. | GAO-14-621

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated multiple models for each year from 2006 through 2013 to assess the sensitivity of 

estimated funding cost differences to alternative measures of capital adequacy, volatility, bond 

liquidity, and size or systemic importance and then used the models to compare bond funding costs 

for bank holding companies of different sizes but the same levels of credit risk, bond liquidity, and 

other characteristics. This table shows bond funding cost comparisons from models for 2008 and 

2013 for bank holding companies with the average level of credit risk for those years, and from 

models for 2013 for bank holding companies with the average level of credit risk for 2008. 

*=statistically significant at the 10 percent level. **=statistically significant at the 5 percent level. 

***=statistically significant at the 1 percent level.

a

The baseline model used average bond yield spreads calculated using prices from executed trades, 

executable quotes, and composites of executable and indicative quotes to measure bond funding 
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 82 GAO-14-621 Large Bank Holding Companies 

costs; total assets to measure bank holding company size; issue size and total trade volume to 

measure bond liquidity; equity capital and subordinated debt as percents of assets to measure capital 

adequacy; and each of equity price volatility, option implied volatility, equity return volatility, excess 

equity return volatility, and earnings volatility to measure volatility, as well as a model with no volatility 

measure. Other explanatory variables include coupon, time to maturity, Texas ratio, maturity 

mismatch, and operating expenses.

Figure 4 shows estimated bond funding costs for bank holding companies 

with $1 trillion in assets versus those with $10 billion in assets by model 

and year, assuming that all bank holding companies have the average 

level of credit risk in each year.

Figure 4: Difference in Estimated Bond Funding Costs for Average Credit Risk Bank Holding Companies with $1 Trillion 

versus $10 Billion in Assets by Model Specification, by Year, 2006-2013
Appendix I. Methodology for Analysis of 

Funding Cost Differences between Large and 

Small Bank Holding Companies

Page 83 GAO-14-621 Large Bank Holding Companies 

Notes: We estimated econometric models of the relationship between bank holding company size 

and funding costs using data for U.S. bank holding companies and their outstanding senior 

unsecured bonds for the first quarter of 2006 through the fourth quarter of 2013. The models used 

bond yield spreads to measure funding costs and controlled for credit risk factors such as capital 

adequacy, asset quality, earnings, maturity mismatch, and volatility, as well as bond liquidity and 

other characteristics of bonds and bank holding companies that can affect funding costs. We 

estimated 42 models for each year from 2006 through 2013 to assess the sensitivity of estimated 

differences in funding costs to alternative measures of capital adequacy, volatility, bond liquidity, and 

size or systemic importance. We used the models to compare bond funding costs for bank holding 

companies of different sizes but the same levels of credit risk, bond liquidity, and other 

characteristics. This figure compares bond funding costs for bank holding companies with $1 trillion 

and $10 billion in assets, for each model and for each year, with average levels of credit risk. Each 

circle and dash shows the comparison for a different model, where circles and dashes below zero 

suggest bank holding companies with $1 trillion in assets have lower bond funding costs than bank 

holding companies with $10 billion in assets, and vice versa.
Appendix II: Comments from the Department 

of the Treasury

Page 84 GAO-14-621 Large Bank Holding Companies 

Appendix II: Comments from the Department 

of the Treasury
Appendix II: Comments from the Department 

of the Treasury

Page 85 GAO-14-621 Large Bank Holding Companies 
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 86 GAO-14-621 Large Bank Holding Companies 

Lawrance L. Evans, Jr., (202) 512-4802, or EvansL@gao.gov

In addition to the contact named above, Karen Tremba (Assistant 

Director), John Fisher (Analyst in Charge), Bethany Benitez, Michael 

Hoffman, Risto Laboski, Courtney LaFountain, Rob Letzler, Marc Molino, 

Jason Wildhagen, and Jennifer Schwartz made significant contributions to 

this report. Other assistance was provided by Abigail Brown, Rudy 

Chatlos, Stephanie Cheng, and José R. Peña.

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments:
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