British banks are still too big to fail

December 19, 2012 3:15 pm

Author:

Tags:

Share this Article

This week could see Ed Miliband’s first big test on banking reform. The parliamentary commission into banking standards is due to report on Friday and is likely to reopen debate about whether retail and investment banking should be fully separated.

We already know the Chancellor isn’t keen on a full separation. But the reality is even a full split of retail banks from their riskier investment arms will leave us with a lingering problem – banks that are too big to fail.

Today the new economics foundation has found that Barclays, Lloyds, RBS, and HSBC enjoyed implicit subsidies of £10bn, £9bn, £11bn and £5bn respectively last year because markets believe they are too big to fail.

All the large banks (not just those that received a bail out) benefit from this subsidy because assume the government will step in and bail-out these very large and highly-interconnected institutions if they ever get into trouble. This translates into lower interest rates for big banks, which saves them enormous sums of money when they borrow.

The size of the subsidy and the fact it’s still so large (it peaked at £54 billion in 2009) present major challenges to delivering a fair and productive banking system.

New and smaller banks do not benefit from the subsidy, and so they find it extremely difficult to compete with the big four. It encourages banks to take on more risk, and increases their reliance on short-term funding instead of customer deposits. Moreover there is no evidence that banks pass this benefit to their customers, it simply inflates their profits.

But most importantly, the ‘too-big-to-fail’ subsidy is a key barometer of whether taxpayers have been taken off the hook for the failures of bankers, and the judgement of the financial markets is that nothing has changed. This year Ed Miliband took a bold stance on banking reform. If he’s serious he needs to tackle the issue of institutions that have become too big to fail.

This week’s parliamentary commission offers a great opportunity for him to push the government to examine more ambitious proposals they are already considering in America, such as capping the size of banks that have grown bigger than our economy can bear.

Lydia Prieg is a senior finance researcher at the New Economics Foundation

Latest

  • News David Jamieson elected as Labour win West Midlands PCC by-election

    David Jamieson elected as Labour win West Midlands PCC by-election

    Labour’s David Jamieson has been elected as the new Police and Crime Commissioner of the West Midlands, following yesterday’s by-election. Jamieson received 50.8% of first preferences across the seven councils voting, meaning that second preferences did not have to be taken into account. The full result is: Labour – 102,561 (50.8%) Conservatives – 54,091 (26.8%) UKIP – 32,187 (15.9%) Lib Dems – 13,056 (6.5%) Due to the lack of independent candidates Labour, the Tories and UKIP all saw their share of […]

    Read more →
  • Comment Scotland We shouldn’t be forced to choose whether we’re Scottish or British – we can be both

    We shouldn’t be forced to choose whether we’re Scottish or British – we can be both

    Less than a month to go until Scotland’s referendum and I’m now sixty meetings into my 100 open air street meetings across Scotland. I marked the halfway point in Glasgow city centre’s Buchanan Street. Hundreds of people joined in. The City Council Leader Gordon Matheson and I enjoyed the good old fashioned politics in the Glasgow drizzle. Fast forward a couple of days and after campaign stops in Bathgate and Linlithgow with Michael Connarty MP, I was off to Edinburgh […]

    Read more →
  • Comment Labour must be the party for the socially excluded

    Labour must be the party for the socially excluded

    This week David Cameron announced an extension of the Troubled Families programme. Since then, the right wing press have come out hard against our country’s poor, marginalised, and socially excluded, repeatedly using the dangerous term ‘underclass’ to describe them. The announcement led to the following headlines: “Rise of new underclass” (The Sunday Times, £), “Underclass ‘costing the country £30bn a year’” (The Times £), and “Revealed, the staggering scale of Britain’s underclass” (Daily Mail). Labour must offer an alternative narrative […]

    Read more →
  • Comment Young people are political, we need to show them politics is worth their time

    Young people are political, we need to show them politics is worth their time

    Energetic. Ambitious. Optimistic. Passionate. Working with young people for nearly a decade taught me they’re the most likely of all age groups to challenge, ask hard question and tell it as it is. But young people are also the least likely of all age groups to vote. Why?Maybe it’s because they get a bad deal from politicians. Since the Coalition came to power young people have been squeezed hard. If you’re under 35 you’re more likely to be out of […]

    Read more →
  • News Under 30? Your wages have dropped by 10% under the Tories, says Leslie

    Under 30? Your wages have dropped by 10% under the Tories, says Leslie

    Chris Leslie, shadow chief secretary to the Treasury, will today give a speech in which he will outline how young people, in particular those he calls ‘Generation rent’, are shouldering a “heavy burden” under the Tories. He will explain that people under 30 have been “hit the hardest” by Government policy because since 2010 this demographic group have seen a real-term drop in weekly wages of 10%. The figures Leslie will reveal show that the hardest hit are 18-to 21-year-olds, whose earning have […]

    Read more →