Chart of the day: £120bn subsidy to the banks in 2009

New Statesman

The chart shows the aggregate implicit subsidy from the British Government to Barclays, HSBC, Lloyds Banking Group and Royal Bank of
Scotland. In 2009, the Government gave the banks guarantees worth well in excess of £100bn.

A new paper (pdf) by the Bank of England examines the implicit subsidies to British banks by the government over the period of the financial crisis. The authors examine two ways in which the government can be seen to have susidised banks.

The first is the "funding advantage". Due to the government guaranteeing the debt of the banks – both through standard deposit guarantees, and through the promise that "too big to fail" banks wouldn't be allowed to fail – there was a reduction in the cost of borrowing at those banks. This reduction can be valued, and that value is the cost of the implicit subsidy.

The second is the "contingent claims" model.  This values the subsidy as "the expected payment from the government to the banking system necessary to prevent default".

As David Keohane points out:

While there are significant problems with all of the approaches. . . it is still worth noting that despite the massive differences between the estimates (made in this paper and elsewhere), each puts a rather large figure on the recent transfer of resources from the government to the banking system. And that has to have consequences.