New nef analysis quantifies the 'too-big-to-fail' (TBTF) subsidy for Britain's big four banks last year and finds:
– Barclays, RBS, HSBC and Lloyds enjoyed combined savings of £37.7 billion because financial markets deem them too big to fail.
– Smaller banks and new competitors disadvantaged: they can't enjoy the subsidised borrowing rates of the big four.
– Our banking system remains too concentrated and risky: If 2014 brings another financial crisis taxpayers will again bear the costs of a banking bailout.
– Big four banks give taxpayers little back in return – even under the new Funding for Lending scheme, banks have increased their lending to households and businesses by just £3.6bn.
– nef welcomes new statistics on bank lending published tomorrow by Council of Mortgage Lenders (CML) and the British Banking Association (BBA).
After another year of mis-selling scandals, IT glitches, and continued failure to boost lending to households and small businesses, new research from nef finds the UK's big banks still benefit from large implicit taxpayer subsidies.
£37.7bn TBTF subsidy
Using Bank of England methodology, nef analysis calculates how much large commercial banks benefit because financial markets assume government support in the case of financial crisis. For 2012 this figure was £37.7 billion for Barclays, RBS, Lloyds and HSBC combined.
Big banks are able to access funding at significantly lower interest rates than other firms and their competitors. Lower rates are an implicit government subsidy: credit ratings agencies perceive taxpayers will bail out big banks in the event they run into difficulty.
Impact of the subsidies
Smaller banks and new entrants to the banking sector do not benefit from TBTF subsidies. This creates a clear barrier to entry for new competitors and discriminates against smaller banks.
In addition to this competitive advantage, nef research has found too big to fail subsidies increase large banks' reliance on short-term and more risky funding instead of customer deposits. The subsidies mask cost inefficiency and excessive executive remuneration by flattering the financial performance of banks.
nef research looked at other sectors of the economy and found no sign of similar subsidies – the TBTF subsidy is not enjoyed by any other industry and is unique to large banks.
Systemic failure
Taxpayers continue to see little benefit from the banking system they bailed out and continue to subsidise. The Bank of England's Funding for Lending scheme is another example of government-funded support, reducing the cost of bank funding for specific types of loans -business loans and mortgages. While banks have drawn £23bn since July 2012, nef calculations show that banks have increased their lending by just £3.6bn.
Under the scheme, banks have required £6.38 of subsidised funding to increase their lending to the real economy by £1.
Action needed
The big four banks enjoy a highly privileged position in our economy but deliver little back in return. There is a need for fundamental reform to ensure renewed competition in our banking system and greater support for local economies.
The UK is unique among its industrial competitors because of its lack of local banking infrastructure, institutions proven to boost lending to businesses and communities. nef outlined how the UK could benefit from a more diverse banking system earlier this year in its Stakeholder Banks report.
Tony Greenham, Head of Finance and Business at nef said:
"Each year big banks save billions of pounds because financial markets believe they are too big to fail. The size of these subsidies remains staggering, and suggests reforms have not gone far enough to tackle the problems in British banking. UK taxpayers are still on the hook for the big banks.
"UK retail banking remains a curious kind of public-private partnership, but a highly unequal one – the public take the losses while private interests take the profits. Despite huge government subsidies, big banks still aren't supporting the interests of the real economy. Even government attempts to bribe the banks into lending seem to have had little effect.
[Responding to figures on bank lending from the Council of Mortgage Lenders and the British Banking Association] "New lending figures published today are an important step towards increasing the transparency of our banks. Once we know where lending is weakest in the UK we can take proper action to ensure all areas of the UK economy are reaching their full potential."
Lydia Prieg, Researcher at nef said:
"Too big to fail subsidies are just one way in which our big banks are given a huge commercial advantage over their smaller counterparts. Meanwhile our international competitors support healthy networks of local and regional banks.
"The benefits of a more diverse banking system are well-recognised around the world, but little has yet been done to address this gaping flaw in the UK economy. The government must seriously review how taxpayer-owned RBS could be used to create a network of local stakeholder banks."
