Too big to veil

Banking goliaths can indeed be tamed. Although no country has ended the problem of possibly needing to rescue a hulking financial institution, a new IMF report shows how the United States is doing a better job than most with stronger rules and less concentration. Putting a figure on the scale of subsidies also gives lawmakers a useful target. US, Japanese, British and European mega-banks receive funding subsidies of as little as $150 billion and up to about $600 billion, according to the IMF. And unlike so many analyses that only survey pre-crisis banking, this one extends to 2012, after investors had digested new regulations seeking to prevent future bailouts.

More detailed figures say the United States is best at slaying the traditional advantage of the too-big-to-fail set. Their funding costs are just 0.15 percentage point less than for smaller banks. Elsewhere in the world, the gap ranges from 0.2 percentage point to 0.9 percentage point. That puts US titans near their modest pre-crisis edge, which may be as much a result of old-fashioned scale advantages as any government rescue expectations.

The relatively inferior positions of overseas lenders aren't entirely the fault of policymakers. Other countries generally have a more concentrated banking sector than does the United States. The three largest US banks by assets - JPMorgan, Bank of America and Wells Fargo, according to the Federal Deposit Insurance Corp - account for some 45 per cent of the nation's total, while in the United Kingdom and France, where the likes of Royal Bank of Scotland and BNP Paribas reign supreme, it is about 60 per cent.

Rules probably have something to do with it, too, though. The IMF documents market reactions to certain important regulatory developments. For example, when President Barack Obama provided the initial blueprint for financial reform in mid-2009, big bank credit-default spreads widened by 0.36 percentage point, implying that investors saw more risk because bailouts seemed less likely. The policy prescription is a little clearer now for nations having a tougher time licking too big to fail. A combination of bank size restrictions to reduce concentration, stronger capital requirements and more credible mechanisms for resolving troubled behemoths each would make a difference. Such solutions aren't novel but there is now some evidence that suggests they actually work.