The worst thing about too-big-to-fail is the competitive inequity it creates. Business is hard enough without the government picking winners and losers.

Clearly, institutions which have the backing of the U.S. Treasury represent a better risk than institutions without such backing. Government-backed institutions have an advantage when it comes to raising money; it is easier for them to attract deposits and to attract Wall Street investors. This allows them to lend at lower rates than banks that don’t have explicit government backing. 

Take a good look at the this research study by the Washington, D.C.-based Center for Economic and Policy Research. It’s called “The Value of the Too-Big-To-Fail Big Bank Subsidy.” Authors Dean Baker and Travis McArthur look at the cost of funds for banks. It divides the industry into two groups: those with more than $100 billion, which it deems too-big-to-fail, and all the rest. It turns out the big banks, indeed, enjoy a substantial advantage in terms of cost of funds compared to smaller banks. The size of the advantage jumped substantially between Oct. 1, 2008 and June 30, 2009, a period in which the government made it clear that too-big-to-fail is real, not just a theory.

If you work at a bank with less than $100 billion, you have every right to be upset. Your tax dollars are being used to subsidize your competition. This is simply wrong and financial services industry reform, which Congress is considering now, must rectify this competitive inequity.

(For more on this topic, be sure to look for the Straight Talk column in the Nov. 1-14 edition of NorthWestern Financial Review.)