Measuring the TBTF effect on bond pricing: Supplemental data

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1 Measuring the TBTF effect on bond pricing: Supplemental data Data discussion This publication gives further information on the methodology used in our paper published on May 22, 2013, Measuring the TBTF effect on bond pricing. We discuss the methodology behind our analysis of relative bond spreads and provide a list of the banks used in the analysis. Adding an analysis of non-us banks We also look at USD-denominated bonds issued by non-us banks to analyze their relative bond spreads. Since the beginning of 2011, we can see that the non-us banks have experienced a funding advantage for size, while the US banks have not seen the same advantage. Steven Strongin (212) steve.strongin@gs.com Amanda Hindlian (212) amanda.hindlian@gs.com Sandra Lawson (212) sandra.lawson@gs.com Jorge Murillo (212) jorge.murillo@gs.com Koby Sadan (212) koby.sadan@gs.com Balakrishna Subramanian (212) bala.subramanian@gs.com The is the public policy research unit of Goldman Sachs Global Investment Research. Its mission is to provide research and high-level advisory services to policymakers, regulators and investors around the world. The Institute leverages the expertise of Research and other Goldman Sachs professionals to offer written analyses and host discussion forums. The Goldman Sachs Group, Inc. Global Investment Research

2 Details on data and methodology regarding bond spreads We obtained bond spread data from the IBOXX Investment Grade Index, which contains daily pricing information for investment grade bonds traded in the US from January 1999 to March We mapped all bonds in the index to the ultimate parent company using the S&P Capital IQ ISIN database. We then limited the universe to US-based firms. We classified as banks those firms that had at least one FDIC-insured affiliate; this allowed us to exclude other non-bank financials such as stand-alone asset managers and brokerdealers, insurance companies and REITs. Broker-dealers that became bank holding companies in 2008 were classified as banks throughout the entire sample period. From 1999 to 2013, there are a total of 42 unique banks. (While we indicated in our initial publication that there were 44 unique banks, we think it is more appropriate to categorize the universe as 42.) Exhibit 1 has the full list of these banks. To make the spreads of bonds with different maturities comparable, we benchmarked all spreads to a US Treasury bond of comparable maturity. We mapped all bond identifiers (ISINs) to the corresponding parent firm using the S&P Capital IQ ISIN database. We then calculated for each firm the median spread across all of the firm s bonds that priced on that day. We determined firm size in two ways. For banks, we sorted by asset size and compared the average spread of the six largest banks (those with assets above $500bn) against the average spread of the remaining banks (18 on average over the entire period). In all other industries, we based size on revenues rather than assets, given that revenues are the standard measure of size in most other industries. We used the S&P Capital IQ Financials Database to obtain the fiscal year-end revenue of each non-bank firm from the latest reported income statement matched to the corresponding bond pricing date. We limited our analysis to those firms that had both a bond spread and a matched income statement, excluding any firms that were not present in the S&P Capital IQ dataset or whose financial data were outdated by more than two years. To calculate the spread differential in non-bank industries, we classified as big the top 10% of firms by revenues. We then compared the average spread in this category to the average spread among the smallest firms, defined as the bottom quartile by revenues. To obtain the non-financial composite bond spread differential, we weighted each industry by the number of firms in the industry. The Goldman Sachs Group, Inc. 2

3 Exhibit 1: List of US banks in the IBOXX IG bond index Today's largest six banks Bank of America Corp. Citigroup, Inc. Goldman Sachs Group, Inc. JPMorgan Chase & Co. Morgan Stanley Wells Fargo & Company Other banks American Express Company Ameriprise Financial, Inc. Bank of New York Mellon Corp. Bank One Corp. BankBoston Corp. BB&T Corp. BlackRock, Inc. Capital One Financial Corp. Capmark Financial Group Inc. Charles Schwab Corp. Countrywide Financial Corp. Discover Financial Services Fifth Third Bancorp First Horizon National Corp. FleetBoston Financial Corp. General Electric Capital Corp. Other banks (contd.) Golden West Financial Corp. International Lease Finance Corp. KeyCorp Lehman Brothers Holdings, Inc. MBNA Corp. Merrill Lynch & Co., Inc. National City Corp. Northern Trust Corp. People's United Financial Inc. PNC Financial Services Group, Inc. Regions Financial Corp. Residential Capital, LLC SLM Corp. State Street Corp. SunTrust Banks, Inc. U.S. Bancorp Union Planters Corp. Wachovia Corp. Washington Mutual Zions Bancorporation Note: We classified as US banks US firms in the IBOXX IG index that have at least one FDIC-insured affiliate Source: IBOXX Investment Grade Index, Goldman Sachs Research The Goldman Sachs Group, Inc. 3

4 Adding an analysis of relative bond spreads among non-us banks We have also conducted a similar analysis on the relative spreads of non-us banks. To do so, we looked at the universe of USD-denominated bonds issued by non-us banks in the IBOXX investment grade index. We followed the IBOXX industry classification and then manually removed firms without retail banking operations. This gave us a total of 103 unique banks throughout the January 1999 to March 2013 period. We classified banks with assets above $500bn as the largest banks. Exhibit 2 shows the relative bond spreads between the largest banks and the other banks with USD-denominated debt in the IBOXX IG index, comparing the relative spreads for non-us bank issuers against the relative spreads for US bank issuers. Since the beginning of 2011, the largest non-us banks have experienced a funding advantage, while the opposite is true for the largest US banks, which have seen a disadvantage. Exhibit 2: The largest non-us banks currently enjoy a relative funding advantage that the largest US banks do not Bond spread differential by size for US banks and non-us banks Smaller firms enjoy a funding advantage Basis points (bp) Largest firms enjoy a funding advantage Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00 Jul-99 Jan-99 Spread differential for US banks Spread differential for non-us banks Note: The bond spread differential is calculated as the difference between the average bond spread of the six largest US banks by assets and the average bond spread for all the other US banks in the IBOXX index. For the non-us banks, the bond spread differential is calculated as the difference between the average bond spread of all the banks with assets above $500bn and the average bond spread for all the other non-us banks in the IBOXX index. Bond spreads are calculated relative to the interest rate on US Treasury bonds with comparable maturities. Source: IBOXX Investment Grade Index, S&P Capital IQ, Goldman Sachs Research The Goldman Sachs Group, Inc. 4

5 Disclosures This report has been prepared by the, the public policy research unit of the Global Investment Research Division of The Goldman Sachs Group, Inc. ( Goldman Sachs ). As public policy research, this report, while in preparation, may have been discussed with or reviewed by persons outside of the Global Investment Research Division, both within and outside Goldman Sachs. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities. Distributing entities This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN ); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A. ; in Canada by regarding Canadian equities and by (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: W); and in the United States of America by Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures in addition to specific disclosures required by certain jurisdictions Goldman Sachs conducts a global full-service, integrated investment banking, investment management and brokerage business. It has investment banking and other business relationships with governments and companies around the world, and publishes equity, fixed income, commodities and economic research about, and with implications for, those governments and companies that may be inconsistent with the views expressed in this report. In addition, its trading and investment businesses and asset management operations may take positions and make decisions without regard to the views expressed in this report Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc. The Goldman Sachs Group, Inc. 5