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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Industrial Strategy: Ensuring digital skills are included

The opportunities for efficiency, adaptability and growth offered by digital skills have never been so important to British businesses. The New Statesman asked a panel of experts, including Digital Minister Matt Hancock, Tinder Foundation CEO Helen Milner, Tech City CEO Gerard Grech and Google Policy Manager Katie O’Donovan, to pinpoint the weak spots and the opportunities for a smarter digital skills strategy.

British people spend more per capita online than any other country in the developed world. With 82 per cent of adults using the internet on a daily basis and more than 20 per cent of retail sales taking place online, it would appear that most British businesses are digitally capable. A closer look, however, reveals a significant digital skills gap between larger companies and the small businesses that make up 60 per cent of the private sector – comprising a workforce of over 15 million people, with a turnover in excess of £1.6trillion. Of these small enterprises, a third don’t have a website and more than half are unable to sell goods online. So, are digital skills taking priority in the government’s industrial strategy?

Matt Hancock, Minister of State for Digital and Culture, said digital education from an early age will be a cross-party objective for years to come: “We’re making some progress on this, and one of the most exciting things we did in the last parliament was to put coding into the curriculum from age eight. We’ve recognised that there are down-the-track requirements for digital skills, as much as with English and Maths, and we’ve got a huge array of initiatives to corral the enthusiasm for digital and make sure that it is best used.”

Hancock added that participation in the digital economy is important at every level of business and society: “I can group the facts and figures; 23 per cent of people currently lack basic digital skills, and about 90 per cent of new jobs now need some form of them. I think that what we’ve learnt following the Brexit vote is that the need to engage everybody is more demonstrable than ever before. This is a very important part of the Prime Minister’s agenda, and wider digital engagement is a key part of the broader issue to make an economy that works for everyone.” 

It is this wider opportunity to access and education that forms the bedrock of a new partnership between Google and the Tinder Foundation, aiming to deliver digital skills training to those in society who are most in need. Cue the Digital Garage. The project sees community organisations across the country provide skills support to small businesses, sole traders and indviduals, helping them to make the most of their resources.

Katie O’Donovan, Policy Manager at Google, explained: “Google has a longstanding commitment to train 250,000 people across the UK in digital skills. Since launching the Digital Garage in 2015 we’ve provided mentoring and digital skills training in Leeds, Manchester, Birmingham, Newcastle and Glasgow.  But as the UK faces a new chapter we want to ensure, whether you’re a student looking for your first job, a small business looking to attract new customers or a musician looking to promote your music, the right digital skills are freely available in your local community.

Tinder Foundation CEO Helen Milner recognised that a wider proliferation of digital skills would release a surprising amount of value into the economy. “Some of our research showed that every £1 invested in growing people’s basic digital skills put £10 back into the economy. But it’s not enough to save money - you’ve got to show how you can make money out of it as well.”    

The Labour MP for Aberavon, Stephen Kinnock, has seen at first hand the benefits of support for digital skills, and welcomes opportunities for partnership in his constituency. The shift from manufacturing, he accepts, needs direction and following the depletion of his local steel works he views digitisation as “the only way forward.” Kinnock added that exciting projects such as the Swansea bay region or ‘internet coast’ becoming a testbed for 5G could serve to re-energise communities which are in many ways in a state of decline. Kinnock said: “I’m absolutely delighted that we’re going to have pop-up versions of the Digital Garage in Port Talbot.”

CEO for TeenTech Maggie Philbin, meanwhile, stressed that digital education at school level must be taught through the lens of practical application. She warned: “Many young people aren’t greeted by any coherent messaging in school, so they don’t see why they’d need digital skills in the workplace. We’ve got to start getting a better message across and improve the opportunities for actual work experience that harnesses these skills.”

Karen Price, CEO at The Tech Partnership shares this view. For Price, adapting apprenticeships to incorporate digital skills will help to inspire a culture of innovation. She suggested that “if that's part of an apprenticeship that could be polished to use in a business environment, you'd have a digitally capable young person who could probably move that business on in a different way.”

Nick Williams, Consumer Digital Director for Lloyds Banking Group, views improving people’s digital skills as a matter of urgency and brought up research conducted by the company’s new Business Digital Index for 2016 which found that 38 per cent of small businesses and 49 per cent of charities are currently lacking digital maturity. “It’s no longer a matter of choice,” Williams said, “for organisations to survive, we must focus on a digital message.  Technology’s moved on and people just haven’t kept up. We have to show how these new skills can translate to greater productivity. Ability and access are the two variables to address. We are on the brink of going down the route of a digital divide – those who are capable and those who aren’t – and we’ve got to stop that.”

Rachel Neaman, Director of Skills and Partnerships at Doteveryone, was quick to pick up on this point. She warned that any digital training must not simply be for future generations’ benefit, but also be afforded to those already in work. “What are we doing for the people who currently lack these skills? How do we stop people from being left behind?” Neaman called for an “equal emphasis” on updating and upgrading the existing workforce. Julian David, the CEO at Tech UK, was also keen to highlight that digitisation is “an ongoing process” and therefore “retraining” at regular intervals is needed to cope with a continually evolving demand.

While Hancock spoke of a “unit-based standard learning system”, similar to that used in American schools, to help apply digital skills training where it is most appropriate, IPPR North researcher Jack Hunter said there were real opportunities to be grasped in the coming devolution agenda: “The new mayors that are coming in next year to drive the agenda and economic growth are going to be getting a lot more funding around a variety of different skills streams that feed directly into the digital programme.”

The panel agreed that the digital divide will only grow wider if action is not taken. Director of the Action and Research Centre at the RSA Anthony Painter said that society is being split into two camps: “the confident and creative, and those who feel held back.” Painter recommended that the latter group are given a fresh chance at being empowered digitally. He said: “They don’t tend to use the internet for professional development, whereas the others do. We’ve been having a look at this locally by creating a ‘City of Learning’ which combines a digital platform built around open badges which have micro-accreditations for learning; things that if you get someone’s passionate interest and then start feeding into more formal learning opportunities then you wrap around that a sort of city-led campaign which lets them identify with a common cause – we’re a learning city.”

Tech City UK CEO Gerard Grech concurred and went to explore the link between a strong web presence and business expansion or improvement. The problem identified is that many businesses may not realise the extent of their digital capabilities and thus run the risk of missing out. Grech said: “If you ask a window cleaner if they are a digital business, they might say no, but if you ask how they might go about quoting someone, they could find the address on Google Maps or get the Street View. That’s the idea, to show how digital can be used for them.”

Ultimately, the panel concluded, that the enthusiasm to add a digital depth to Britain’s talent pool was validated by its potential advantages. “A lot of the major challenges facing the economy,” Painter summed up, “are actually rooted in skills. Whether it’s the challenges of Brexit or the challenges of broadband, I think if you fix the skills, everything else falls into place.” The panel agreed that any government has a responsibility to champion digital strategy throughout society, regardless of location or economic standing, and equip businesses with the digital skills required to perform at their best.  

The round-table discussion was chaired by Kirsty Styles.

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