{"id":11816,"date":"2011-09-09T12:35:56","date_gmt":"2011-09-09T11:35:56","guid":{"rendered":"http:\/\/www.taxresearch.org.uk\/Blog\/?p=11816"},"modified":"2011-09-09T12:35:56","modified_gmt":"2011-09-09T11:35:56","slug":"the-big-5-banks-private-welfare-state","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2011\/09\/09\/the-big-5-banks-private-welfare-state\/","title":{"rendered":"The Big 5 banks’ private welfare state"},"content":{"rendered":"

Lydia Prieg<\/em><\/strong> is a researcher at the new economics foundation (nef<\/a>). She wrote this on the Left Foot Forward blog yesterday:<\/a><\/em><\/p>\n

<\/em>A new report (pdf<\/a>) by the new economics foundation (nef<\/a>) estimates that the \u2018Big Five\u2019 UK banks (Barclays, RBS, Lloyds, HSBC and Nationwide) enjoyed a \u00a346 billion \u2018too-big-to-fail\u2019 (TBTF) subsidy in 2010.<\/p>\n

This subsidy arises because large banks are able to borrow at lower interest rates than they would be able to if they operated in a truly free market \u2014 a result of the implicit understanding in the market that the government\u00a0will step in and bail out investors if a large bank defaults on its debt payments.<\/strong><\/p>\n

The report uses\u00a0methodology developed by the Bank of England<\/a>, and, for the first time, as Graph 1 shows, quantifies the TBTF subsidy for each individual bank.<\/p>\n

Graph 1:<\/p>\n

\"Big-five-banks-too-big-to-fail-subsidy\"
\nIn addition to unfairly inflating banks\u2019 profits, these TBTF subsidies give large banks a huge competitive advantage (\u00a3<\/a>) over their smaller counterparts. Moreover, even ignoring the financial value of this subsidy, while the market suspects the government will ultimately intervene if a bank gets into trouble, risks will not be fully shouldered by the risk-takers.<\/p>\n

This undermines market discipline<\/strong> (\u00a3<\/a>) and incentivises banks to engage in risky practices.<\/p>\n

Finally, it is also important to recognise that while the TBTF subsidy does not involve the\u00a0direct<\/em>transfer of funds from the Treasury to the banks, it may involve an\u00a0indirect <\/em>transfer, as the interest rate at which investors will lend to the government may increase to reflect the additional risk the government is taking on board in effectively underwriting banks\u2019 balance sheets.<\/p>\n

This upcoming Monday, the Independent Commission on Banking (ICB<\/a>), otherwise known as the \u2018Vickers Commission\u2019, will release its final report advising the government on how issues such as the TBTF problem should be addressed.<\/p>\n

In its\u00a0interim report<\/a>, the Commission advocated \u2018ring-fencing\u2019 the retail and investment banking subsidiaries within an investment bank. This is despite the Commission\u00a0admitting<\/a> that such an initiative will reduce but not eliminate the subsidy.<\/p>\n

Furthermore, as ring-fencing will permit transfers between retail and investment banking up to a point, the taxpayer will still, to a certain extent, be underwriting investment banking activities.<\/p>\n

So next time you hear the big banks cry foul of needless government interference, remember that government interference is worth billions to the industry.<\/strong> As long as the government\u00a0 offers such a subsidy, it is only fair that it set the banks the rules we need to avoid a repeat of the banking crisis, and insist that bankers contribute their fair share to society.<\/p>\n","protected":false},"excerpt":{"rendered":"

Lydia Prieg is a researcher at the new economics foundation (nef). She wrote this on the Left Foot Forward blog yesterday: A new report (pdf)
 Read the full article…<\/em><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[70],"tags":[],"class_list":["post-11816","post","type-post","status-publish","format-standard","hentry","category-banking"],"_links":{"self":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/11816","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/comments?post=11816"}],"version-history":[{"count":0,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/posts\/11816\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/media?parent=11816"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/categories?post=11816"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxresearch.org.uk\/Blog\/wp-json\/wp\/v2\/tags?post=11816"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}