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.

Getty Images.
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Labour MPs believe Jeremy Corbyn is incapable of tackling anti-Semitism

The leader's insistence that "there's no crisis" has led more to conclude that he must be removed.  

In a competitive field, yesterday was the most surreal - and shameful - day for Labour since Jeremy Corbyn became leader. After a telling delay, Corbyn arrived at the only response that was acceptable to MPs: the suspension of Ken Livingstone. The former mayor of London, who appears incapable of entering a studio without triggering outrage, surpassed himself by claiming Hitler supported Zionism (as if to invalidate the latter). In time-honoured fashion, he then responded to criticism by pouring petrol on the fire. In remarks that caused journalists to question their hearing, Livingstone opined that "a real anti-Semite doesn't just hate the Jews in Israel". 

Two hours later, one of Corbyn's greatest allies was finally suspended (the day after Naz Shah MP had been). But the announcement itself added new offence. The email confirming Livingstone's suspension simultaneously revealed that John Mann MP, who had denounced the former mayor as a "Nazi apologist", had been summoned by the chief whip to "discuss his conduct" - as if their behaviour was somehow comparable. Labour sources later told me that Corbyn's office had wanted to go further and suspend Mann - a demand flatly rejected by the whips. Their resistance has revived the desire among some of the leader's allies for a cull in a future reshuffle. 

But it was Corbyn's conduct in a BBC interview that truly provoked MPs' fury. "It's not a crisis, there's no crisis," he declared, unwittingly echoing the Sun's headline on Jim Callaghan during the Winter of Discontent ("Crisis? What crisis?"). It was as if Hitlergate had never happened. Corbyn added that "the party membership is the biggest it has been in my lifetime" (it was actually higher in 1997) and that "much of this criticism that you are saying about a crisis in the party actually comes from those who are nervous of the strength of the Labour Party at local level". MPs, he appeared to suggest, were not motivated by a desire to repel Labour's anti-Semitic infection but by fear of the party's left-wing membership.

Livingstone's suspension was "very sad", Corbyn said, but "there is a responsibility to lead the party". The abiding impression was that he had suspended his old comrade with the utmost reluctance - it was the burden of office that had forced him to do so. Finally, Corbyn declared, as he always does on these too-frequent occasions, "we are not tolerating anti-Semitism in any way or indeed any other kind of racism." Labour's leader appears congenitally incapable of condemning Jew-hatred in insolation. The explanation, some MPs say, is that he subscribes to a "hierarchy of racism" under which anti-Semitism is a lesser offence than, say, Islamophobia. In rejecting a systematic focus on the former, Corbyn's critics say he is in denial about the scale and significance of the infestation.  

His apathy has intensified the desire of his opponents to remove him before the year is out. "The soft left moved massively today," one MP told me in reference to Labour's internal swing voters. Another said: "It does two things: it firmly pins responsibility for next week's results on the hard-left antics [Labour is forecast to become the first opposition since 1985 to lose council seats in a non-general election year] and it weakens the willingness of the 'core group' servers to keep mopping up after Corbyn because they are increasingly mortified by the association". But others disagreed: "It's strangely less likely," one said of the prospect of a challenge, "the mood is 'keep giving him the rope'". Another said that Labour MPs, traditionally sentimental towards their leaders, lacked the "constitution" for the struggle. "They can always find an excuse why now isn't the right time," he lamented. Without an agreed candidate, and without even agreement on whether there should be a challenge, Corbyn's opponents fear that "even worse is to come". 

George Eaton is political editor of the New Statesman.