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.

Photo: Getty
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Commons Confidential: Herod in the House

Your weekly dose of gossip from around Westminster.

The spell cast over Theresa May by the youthful Gavin Williamson and Cronus, his pet tarantula, leaves envious Tory rivals accusing him of plotting to succeed the Stand-In Prime Minister. The wily Chief Whip is eyed suspiciously as a baby-faced assassin waiting to pounce.

My tearoom snout whispers that May is more dependent on the fresh-faced schemer (he also served as David Cameron’s PPS) who signed a survival deal bunging the DUP £1bn protection money than she is on David Davis, Philip Hammond, Amber Rudd or Boris Johnson. She delegated the reshuffle’s middle and lower ranks to Williamson, but his nous is questioned after he appointed Pudsey’s Stuart Andrew (majority: 331) and Calder Valley’s Craig Whittaker (609) as henchmen. Vulnerable seats are dangerously unprotected when whips don’t speak in the House of Commons.

Left-wing Labour MPs mutter that Jeremy Corbyn is implementing a “King Herod strategy” to prevent the birth of rival messiahs. A former shadow cabinet member insisted that any display of ambition would be fatal. The punishment snubbings of Yvette Cooper and Chuka Umunna, who had expressed a willingness to serve, were intended to intimidate others into obedience. The assertion was reinforced by an influential apparatchik musing: “John [McDonnell] is looking for a bag carrier, so Chuka could apply for that.” The election has laced the boot tightly on the left foot.

The military career of Barnsley’s Major Dan Jarvis included service in Northern Ireland. Perhaps old acquaintances will be renewed with the allocation to Sinn Fein’s seven MPs of a meeting room next to the Labour squaddie’s office.

Ian Lavery, the burly ex-miner appointed as Labour’s new chair by Jeremy Corbyn, disclosed that he was bombarded with messages urging him to “nut” – that is, headbutt – Boris Johnson when he faced down the Foreign Secretary on TV during the election. I suspect that even Trembling BoJo’s money would be on the Ashington lad in a class war with the Old Etonian.

Campaign tales continue to be swapped. Labour’s victorious Sharon Hodgson helped a family put up a tent. The defeated Lib Dem Sarah Olney was heckled through a letter box by a senior Labour adviser’s five-year-old son: “What’s that silly woman saying? Vote Labour!” Oddest of all was the Tory minister James Wharton informing his opponent Paul Williams that he’d put in a good word for him with Labour HQ. There was no need – Williams won.

The Tory injustice minister Dominic Raab is advertising for an unpaid Westminster “volunteer”, covering only “commuting expenses”. Does he expect them to eat at food banks?

Kevin Maguire is Associate Editor (Politics) on the Daily Mirror and author of our Commons Confidential column on the high politics and low life in Westminster. An award-winning journalist, he is in frequent demand on television and radio and co-authored a book on great parliamentary scandals. He was formerly Chief Reporter on the Guardian and Labour Correspondent on the Daily Telegraph.

This article first appeared in the 29 June 2017 issue of the New Statesman, The Brexit plague

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