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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As crime moves online, the police need the investment in technology to follow

Technology offers solutions, not just threats.

It’s perhaps inevitable that as the world becomes more digital, so does crime. This week Alison Saunders, director of public prosecutions, recognised that online crime is as serious as face-to-face crime. “Hate is hate,” Saunders wrote referring to internet abuse, and the police should protect people from it wherever they are. This will add demand to under-pressure police forces. And it is only the tip of the iceberg. 

Forty-seven per cent of crime involves an online element. Police recorded 30,000 instances of online stalking and harassment last year. People are 20 times more likely to be a victim of fraud than robbery, costing businesses an estimated £144bn a year. On a conservative estimate, 2,500 UK citizens use the anonymous dark web browser, Tor, for illegal purposes such as drug dealing, revenge porn and child sexual exploitation.

The police need new technology to meet demand, a Reform report published today finds. Some progress has been made in recent years. West Midlands Police uses an online portal for people to report incidents. Durham uses evidence-gathering software to collect social media information on suspects, and then instantly compile a report that can be shared with courts. Police have benefited from smartphones to share information, and body-worn cameras, which have reduced complaints against police by 93 per cent.

Yet, Theresa May’s 2016 remarks that police use “technology that lags woefully behind what they use as consumers” still stand. Officers interviewed for Reform’s research implored: “Give us the tools to do our job”.

Online evidence portals should be upgraded to accept CCTV footage. Apps should be developed to allow officers to learn about new digital threats, following the US army’s library of knowledge-sharing apps. Augmented-reality glasses are being used in the Netherlands to help officers identify evidence at digital crime scenes. Officers would save a trip back to the station if they could collect fingerprints on smartphones and statements on body-worn cameras.

New technology requires investment, but forces are reducing the resources put into IT as reserves have dried up. Durham plans to cut spend by 60 per cent between 2015-16 and 2019-20. The government should help fund equipment which can meet demand and return future productivity savings. If the Home Office invested the same as the Department of Health, another department pushing “transformative” technology, it would invest an extra £450m a year. This funding should come from administrative savings delivered through accelerating the Government’s automation agenda, which the think tank Reform has previously calculated would save Whitehall £2.6bn a year.

As crime moves online, police must follow. Saunders is right to point to the importance of meeting it. But technology offers solutions, not just threats. Installing the next generation of equipment will give police the tools to do their jobs, addressing online hate and more. 

Alexander Hitchcock is a senior researcher at reform