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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UK to reconsider blood donation ban for men who have sex with men

Under current rules, men who have had sex with another man in the past twelve months cannot donate blood.

During Women and Equalities questions this morning, Jane Ellison MP slipped in a bombshell: men who have sex with other men may soon be able to donate blood. 

Ellision, who is Undersecretary of State for Public Health, said that Public Health England has carried out a new survey of blood donors which is currently being analysed. Next year, the Advisory Committee on the Safety of Blood Tissues and Organs (SaBTO), which sets blood donation guidelines, will use the evidence to review the current policy. 

She said:

Donor referrel for MSM [men who have sex with men] was changed from lifetime to 12 months referral in 2011. Four years later it is time again to look at this issue. Public Health England has conducted an anonymous survey of donors and I'm pleased that the advisory SaBTO will review this issue in 2016.

The current ban (which also applies to a range of other groups including sex workers) is based on the fact that MSM are at higher risk of contracting HIV, according to every Public Health England survey ever conducted on the disease. Both HIV and Hepatitis C don't show up in blood tests immediately, so the 12 month rule is based on leaving a "window" for the diseases to develop and be testable. The rules are ostensibly based on sexual activity, not on sexual orientation.

However, as Michael Fabricant pointed out in response to Ellison's announcement, in practice, it also looks a lot like discrimination - there is no ban on blood donation from straight people who have had unprotected sex, for example. Fabricant continued that "equality on this issue" is needed, and clinicians themselves feel a change is "long overdue".

Blood donations in the UK have fallen by 40 per cent in the last decade, a fact which may have contributed to the decision to review the current rules.

A Stonewall spokesperson said:

We’re delighted the Department of Health Minister Jane Ellison has announced this review.

We want a donation system that is fair and based on up-to-date medical evidence. Currently gay and bi people cannot give blood if they have had sex in the past 12 months,  regardless of whether they used protection. Yet straight people who may have had unprotected sex can donate. These current rules are clearly unfair and we want to see people asked similar questions - irrespective of their sexual orientation - to accurately assess the risk of infection. Screening all donors by sexual behaviour rather than by sexual orientation would increase blood stocks in times of shortage and create a safer supply by giving a more accurate, non-discriminatory assessment.

Barbara Speed is a technology and digital culture writer at the New Statesman and a staff writer at CityMetric.