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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Will Britain end up agreeing a lengthy transition deal with the EU?

It's those seeking to prevent a referendum re-run who have the most to fear from a bungled exit.

You can check out, but you'll never leave? Today's papers all cover the growing momentum behind a transition arrangement after Britain leaves the European Union, whereby the United Kingdom remains in the single market and customs union.

The FT reports on the first meeting between Theresa May and her new “business council”, in which business leaders had one big message for the PM: no-one wants a “no deal” Brexit – and Confederation of British Industry director Carolyn Fairbairn repeated her call for a lengthy transition arrangement.

The Times splashes on government plans drawn up by Philip Hammond that include a two-year transition arrangement and private remarks by David Prior, a junior minister, that Britain was headed for “the softest of soft Brexits”.

A cabinet source tells the Guardian that the transition will last even longer than that – a four-year period in which the United Kingdom remains in the single market.

Broadly, the argument at the cabinet table for a transition deal has been won, with the lingering issue the question of how long a transition would run for. The fear among Brexiteers, of course, is that a temporary arrangement would become permanent.

Their long-term difficulty is Remainers' present problem: that no one is changing their minds on whether or not Brexit is a good idea. Put crudely, every year the passing of time winnows away at that Leave lead. When you add the surprise and anger in this morning's papers over what ought to be a routine fact of Brexit – that when the UK is no longer subject to the free movement of people, our own rights of free movement will end – the longer the transition, the better the chances that if parliament's Remainers can force a re-run on whether we really want to go through with this, that Britain will stay in the EU.

A quick two-year transition means coming out of the bloc in 2022, however, just when this parliament is due to end. Any dislocation at that point surely boosts Jeremy Corbyn's chances of getting into Downing Street, so that option won't work for the government either.

There's another factor in all this: a transition deal isn't simply a question of the British government deciding it wants one. It also hinges on progress in the Brexit talks. Politico has a helpful run-down of the progress, or lack thereof, so far – and basically, the worse they go, the less control the United Kingdom has over the shape of the final deal.

But paradoxically, it's those seeking to prevent a referendum re-run who have the most to fear from a bungled exit. The more time is wasted, the more likely that the UK ends up having to agree to a prolonged transition, with the timing of a full-blown trade deal at the EU's convenience. And the longer the transition, the better the chances for Remainers of winning a replay. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.