An early Christmas present for Britain's biggest banks: £34bn from taxpayers

We’re still giving big banks special privileges and they’re still too big to fail, writes Lydia Prieg.

British banks are still too big to fail. Not only does that have terrifying implications for UK taxpayers in the event of another financial crisis, it also has a distortionary effect on the economy. Why? Because being so big that the government can’t afford for you to go bust has financial benefits, even for banks that never received a bailout.

For instance, once the government implicitly guarantees the debt of banks, the cost of borrowing goes down, as creditors are taking on less risk that they won't get their loan repaid. This reduction can be measured, and its value is the too-big-to-fail (TBTF) subsidy.

Today the new economics foundation has calculated the benefits of the subsidy for 2011 and found they totalled £34bn for the big four banks combined. Barclays, Lloyds, RBS, and HSBC enjoyed subsidies of £10bn, £9bn, £11bn and £5bn respectively. Their competitors didn't get this advantage, and neither do firms operating outside the banking industry.

There are a number of reasons why we should be concerned about this subsidy:

  • It’s unfair: banks do not pass on this benefit to their customers, it simply inflates their profits.
  • It’s anticompetitive: new and smaller banks do not benefit from the subsidy, and so find it extremely difficult to compete with the big four.
  • It encourages banks to take on more risk: they get to pocket any upside from risky trades, but know that taxpayers will be there to pick up the tab if everything goes wrong.
  • It creates a vicious circle: subsidies incentivise banks to get even bigger, concentrating power within the banking sector and creating even larger TBTF institutions that enjoy even higher subsidies and further weaken competition.

But the key point of the subsidy is that the markets are reflecting what politicians frequently deny: the fact that taxpayers may once again be called upon to bail out the banks – exactly what we were promised wouldn’t happen.

The government’s primary prescription for tackling the TBTF problem is to ring-fence retail banking away from investment banking activities. But ring-fencing will only reduce, not eliminate, the TBTF subsidy.

Let’s not forget that Lehman Brothers was an investment bank that had no retail banking component; yet its collapse sent shockwaves around the globe. In the UK we have individual banks with assets greater than UK GDP. Given this, even outright separation between retail and investment banking – which is not what we are getting under current proposals – would still leave lingering TBTF problems.

The Parliamentary Commission on Banking Standards is releasing its recommendations to the government on Friday and has been looking at the ring-fencing proposals in depth. Let us hope that the Commission acknowledges the short-comings of the current plans, and pushes the government to at least examine more radical proposals, such as capping the size of banks.

2012 has made it clear that for all the hustle and bustle on banking reform, fundamental flaws in the system remain completely unaddressed. The Financial Services Act and the Banking Reform Bill fall far short of producing the safe and useful banking system that British businesses, customers and taxpayers deserve.

HSBC, one of the TBTF banks. Photograph: Getty Images

Lydia Prieg is a researcher at the new economics foundation.

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Jamie Reed: What it's like to stop being an MP

As I approach the whips’ office through the tearoom staircase, a colleague shouts: “It’s Steve McQueen!”

Leaving parliament was never going to be easy. Having entered the Commons at a relatively young age – I was 31 – I knew that a parliamentary existence would be strange, even weird.

I knew that I would never be a “lifer”. A long Commons career followed by a sinecure in the Lords was never for me. This was informed by an aversion not to prolonged public service – the career in the nuclear industry for which I have departed parliament is just as dedicated to public service – but to the culture in which politics in Westminster is undertaken. There is a lot wrong with parliament. I arrived with a healthy contempt for its culture, behaviours and practices; I leave with the knowledge that this contempt was correct.

As a young MP, I felt like Carraway, never like Gatsby. Still, leaving the Commons has taken a huge mental and emotional effort.

21 December 2016

The news of my resignation breaks a few hours early because of a leak. The ­Guardian’s north of England editor, Helen Pidd, brings forward the publication of our interview as a result. Within minutes, my phone explodes. Twitter is unusable. My email server begins to creak. I watch with mounting ­anxiety. Ignoring calls from journalists – many of them friends – I talk instead with my fellow MP John Woodcock.

In politics, you acquire a sixth sense for who would be with you in the trenches at the worst moments. John is such a person. I don’t remember the conversation; I just remember hanging up and crying. I ­shower, dress and head for my in-laws’ farm. When I open the door, there are bottles of champagne on the step. That night, trying to avoid the news, I learn that I was young, popular, brilliant and talented. It’s like being at my own funeral. I drink the champagne.

24 December

I receive a text from Jeremy Corbyn wishing me and my family well. I thank him for his warm words on my resignation.

9 January 2017

I’m en route to the Vogtle nuclear power plant near Atlanta, Georgia, as a guest of NuGen. At Vogtle, Georgia Power is building two AP1000 reactors – the same type as will be built in Copeland. This is a project to which I have devoted 12 years of my life – from writing nuclear policy with the Blair government to making sure that Copeland was chosen as a nuclear new-build site and working to ensure that successive governments maintained the policies underpinning the nuclear renaissance that the Blair-Brown administration began.

Clement Attlee’s Labour government created the nuclear industry, the last Labour government created the nuclear renaissance and I am leaving parliament to return to the nuclear industry – yet Labour will be forced to fight the by-election in my former seat amid allegations of being anti-nuclear. There is nothing new in post-truth politics. Lies have always had the power to seduce.

23 January

It’s my last week in parliament and I’ve made arrangements to see the whips. As I approach the whips’ office through the tearoom staircase, a colleague shouts: “It’s Steve McQueen!”

1 February

I leave my home in Whitehaven for Sellafield at 6.45am. As I drive through the frost, an iridescent light appears on the horizon: a new dawn has broken, has it not?

I collect my pass and enter a whirlwind of meetings, inductions and instructions. Everyone is generous, welcoming and warm. It is at this point that, for the first time, I am faced with irrefutable proof that I am no longer an MP. I am reminded of my parliamentary induction. Chief Whip Hilary Armstrong told us, “Get in the chamber . . . Don’t hide . . . Sink or swim . . .” New Labour was no place for a snowflake. I am reminded, too, of my induction by the House payroll and expenses administrators. A year before the expenses scandal shook Westminster, they informed me: “All we ask is that you don’t buy any antiques . . .”

2 February

As when I entered parliament for the first time, I don’t have a desk. I’m hot-desking, or hot-podding, or hot-cubing. I remind myself that, for now, I remain the Crown steward and bailiff of the Manor of Northstead.

I bump into a colleague from my first time in the nuclear industry. “All right?” he asks.

“Getting there,” I reply.

“You know what they’re saying, don’t you?” he continues.

“No. What?”

“‘The bloody ego has landed.’”

I walk away wondering if it’s now my role in life to remind people of films set in the Second World War.

3 February

It’s a Friday and it strikes me that I have no constituency surgery. Everyone around me has their head down, meeting targets, solving problems. This is a £2bn-a-year operation. There’s no room for Gatsby here. This is why my new role excites me.

The self-immolating stupidity of Brexit, combined with the complex and growing needs of my family, contributed to my decision to leave parliament. Most of all, though, it was the opportunity to work in this organisation and help to drive change within it and my community that caused me to make the switch. My former constituency can and should be at the centre of one of the fastest-growing parts of the UK economy in the years to come. A changing Sellafield and a dynamic industry will be at the heart of this, and time is of the essence.

20 February

The by-election in my former seat draws near and my time as the Crown steward is running out.

I am repeatedly approached by the media for comment and I duck every request. This is for someone else now and I wish my successor well. None of us is indispensable. 

Jamie Reed is Labour MP for Copeland.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit