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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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.