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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France is changing: an army stalks the streets and Boris Johnson wanders the Tuileries

Will Self on the militarisation of France, and Boris Johnson at the Foreign Office.

At the corner of the rue D’Hauteville and the rue de Paradis in the tenth arrondissement of Paris is a retro-video-games-themed bar, Le Fantôme, which is frequented by some not-so-jeunes gens – the kind of thirtysomethings nostalgic for an era when you had to go to an actual place if you wanted to enter virtual space. They sit placidly behind the plate-glass windows zapping Pac-Men and Space Invaders, while outside another – and rather more lethal – sort of phantom stalks the sunlit streets.

I often go to Paris for work, and so have been able to register the incremental militarisation of its streets since President Hollande first declared a state of emergency after last November’s terrorist attacks. In general the French seem more comfortable about this prêt-à-porter khaki than we’d probably be; the army-nation concept is, after all, encrypted deep in their collective psyche. The army was constituted as a revolutionary instrument. France was the first modern nation to introduce universal male conscription – and it continued in one form or another right up until the mid-1990s.

Even so, it was surprising to witness the sang-froid with which Parisians regarded the camouflaged phantoms wandering among them: a patrol numbering eight ­infantrymen and women moved up the roadway, scoping out doorways, nosing into passages – but when one peered into Le Fantôme, his assault rifle levelled, none of the boozing gamers paid the least attention. I witnessed this scene the Saturday after Mohamed Lahouaiej-Bouhlel ran amok on the Promenade des Anglais in Nice – it was a little preview of the new state of emergency.

On Monday 18 July the French premier, Manuel Valls, was booed at a memorial service for the victims of the Nice attacks – while Marine Le Pen has been making all the populist running, whipping up anxieties about the enemy within. For many French, the events of the past week – including the failed Turkish coup – are steps along the way limned by Michel Houellebecq in his bestselling novel Submission; a via dolorosa that ends with La Marianne wearing the hijab and France itself annexed by a new caliphate.

Into this febrile drama comes a new player: Boris Johnson, the British Foreign Secretary. What can we expect from this freshly minted statesman when it comes to our relations with our closest neighbour? There is no doubt that Johnson is a Francophile – I’ve run into him and his family at the Tuileries, and he made much of his own francophone status during the referendum campaign. In Paris last winter to launch the French edition of his Churchill biography, Johnson wowed a publication dinner by speaking French for the entire evening. He was sufficiently fluent to bumble, waffle and generally avoid saying anything serious at all.

Last Sunday I attended the Lambeth Country Show, an oxymoronic event for which the diverse inhabitants of my home borough gather in Brockwell Park, south London, for jerked and halal chicken, funfair rides, Quidditch-watching, and “country-style” activities, such as looking at farm animals and buying their products. Wandering among ancient Rastafarians with huge shocks of dreadlocks, British Muslims wearing immaculate white kurtas blazoned with “ASK ME ABOUT ISLAM” and crusty old Brixton punks, I found it quite impossible to rid my mind of the Nice carnage – or stop wondering how they would react if armed soldiers were patrolling, instead of tit-helmeted, emphatically unarmed police.

I stepped into the Royal Horticultural Society marquee, and there they were: the entire cast of our end-of-the-pier-show politics, in vegetable-sculpture form and arrayed for judging. There was Jeremy Corbyn (or “Cornbin”) made out of corncobs – and Boris Johnson in the form of a beetroot, being stabbed in the back by a beetroot Michael Gove. And over there was Johnson again, this time rendered in cabbage. The veggie politicians were the big draw, Brixtonians standing six-deep around them, iPhones aloft.

The animal (as opposed to the vegetable) Johnson has begun his diplomatic rounds this week, his first démarches as tasteless and anodyne as cucumber. No British abandonment of friends after Brexit . . . Coordinated response to terror threat . . . Call for Erdogan to be restrained in response to failed coup . . . Blah-blah, whiff-whaff-waffle . . . Even someone as gaffe-prone as he can manage these simple lines, but I very much doubt he will be able to produce rhetorical flourishes as powerful as his hero’s. In The Churchill Factor: How One Man Made History, Johnson writes of Winnie overcoming “his stammer and his depression and his ­appalling father to become the greatest living Englishman”. Well, I’ve no idea if Bojo suffers from depression now but he soon will if he cleaves to this role model. His Churchill-worship (like so many others’) hinges on his belief that, without Churchill as war leader, Britain would have been ground beneath the Nazi jackboot. It may well be that, with his contribution to the Brexit campaign, Johnson now feels he, too, has wrested our national destiny from the slavering jaws of contingency.

Of course the differences between the two politicians are far more significant: Johnson’s genius – such as it is – lies in his intuitive understanding that politics, in our intensely mediatised and entirely commoditised era, is best conceived of as a series of spectacles or stunts: nowadays you can fool most of the people, most of the time. This is not a view you can imagine associating with Churchill, who, when his Gallipoli stratagem went disastrously wrong, exiled himself, rifle in hand, to the trenches. No, the French people Johnson both resembles and has an affinity for are the ones caught up in the virtual reality of Le Fantôme – rather than those patrolling the real and increasingly mean streets without. 

Will Self is an author and journalist. His books include Umbrella, Shark, The Book of Dave and The Butt. He writes the Madness of Crowds and Real Meals columns for the New Statesman.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt