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For largest banks, “too big to fail” perception is faded, not forgotten

Big banks today are even more gargantuan than before the financial crisis. But their status as “too big to fail” is weakening, at least according to a new government report.

The report from the Government Accountability Office, a government watchdog agency, says that recent regulatory reforms like the Dodd-Frank Act have effectively “reduced but not eliminated the likelihood the federal government would save the biggest banks from failure. prevent the failure of one of the largest bank holding companies.” The reforms hold the biggest financial firms to a higher level of accountability while increasing their costs and reducing risks, according to the GAO.

In creating the report, the GAO compared funding costs for the biggest financial institutions to those for smaller banks. If the assumption among lenders is that the U.S. government would rather bail out the biggest banks rather than allow them to fail, then that would drive down their costs. The largest banks had lower borrowing costs than their smaller counterparts during the financial crisis between 2007 and 2009. But that the gap has since narrowed because lenders are more uncertain whether the government would bail out the big banks.

The report will likely be held up by large financial institutions as proof that they no longer receive the same level of preferential treatment because of the view that they “too big to fail.” However, smaller banks can point to the reports’ claim that their disadvantage when it comes to lender perception has yet to be eliminated completely.