The ‘Big Five’ banks’ private welfare state

The latest ‘too big to fail’ figures help illustrate just how desperately the Independent Banking Commission needs to show resolve in dealing with the banks.

Lydia Prieg is a researcher at the new economics foundation (nef)

A new report (pdf) by the new economics foundation (nef) estimates that the ‘Big Five’ UK banks (Barclays, RBS, Lloyds, HSBC and Nationwide) enjoyed a £46 billion ‘too-big-to-fail’ (TBTF) subsidy in 2010.

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 – a result of the implicit understanding in the market that the government will step in and bail out investors if a large bank defaults on its debt payments.

The report uses methodology developed by the Bank of England, and, for the first time, as Graph 1 shows, quantifies the TBTF subsidy for each individual bank.

Graph 1:


In addition to unfairly inflating banks’ profits, these TBTF subsidies give large banks a huge competitive advantage (£) 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.

This undermines market discipline (£) and incentivises banks to engage in risky practices.

Finally, it is also important to recognise that while the TBTF subsidy does not involve the direct transfer of funds from the Treasury to the banks, it may involve an indirect 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’ balance sheets.

This upcoming Monday, the Independent Commission on Banking (ICB), otherwise known as the ‘Vickers Commission’, will release its final report advising the government on how issues such as the TBTF problem should be addressed.

In its interim report, the Commission advocated ‘ring-fencing’ the retail and investment banking subsidiaries within an investment bank. This is despite the Commission admitting that such an initiative will reduce but not eliminate the subsidy.

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.

So next time you hear the big banks cry foul of needless government interference, remember that government interference is worth billions to the industry. As long as the government  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.

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30 Responses to “The ‘Big Five’ banks’ private welfare state”

  1. Alex Braithwaite

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  2. ellispritchard

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  3. Michael

    The ‘Big Five’ banks’ private welfare state l Left Foot Forward – http://t.co/D95r6Sn

  4. Political Planet

    The ‘Big Five’ banks’ private welfare state: The latest ‘too big to fail’ figures help illustrate just how despe… http://t.co/qjsaB2B

  5. janet ewan

    The ‘Big Five’ banks’ private welfare state l Left Foot Forward – http://t.co/D95r6Sn

  6. bc

    The ‘Big Five’ banks’ private welfare state | Left Foot Forward http://t.co/J6Y2rhY n Gov wants to cut benefits n homes of family of rioters

  7. peter sweeney

    The ‘Big Five’ banks’ private welfare state | Left Foot Forward http://t.co/J6Y2rhY n Gov wants to cut benefits n homes of family of rioters

  8. Andrew Daniel

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  9. Subversive Brighton

    RT @leftfootfwd: The ‘Big Five’ banks’ private welfare state http://t.co/G13g2Tn

  10. csignals

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  11. Leon Wolfson

    Well, I am surprised. I’m surprised that the Nationwide had that much. Go figure. (Of course, it’s still massively lower…)

  12. Tony Thomas

    The ‘Big Five’ banks’ private welfare state http://t.co/ool8YhU

  13. Alex Weir

    The ‘Big Five’ banks’ private welfare state http://t.co/ool8YhU

  14. News Frames

    Banks' "private welfare state". More info on £46bn hand-out: http://t.co/igihfcg My comment: http://t.co/Nhx6EDt

  15. nef

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  16. carboncoach

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  17. nikki turner

    RT @leftfootfwd: The ‘Big Five’ banks’ private welfare state http://t.co/hKMlC0g It's time to put the welfare back into the Country Mr C.

  18. fernando j. grijalva

    The ‘Big Five’ banks’ private welfare state http://t.co/BSEeM21 RT @leftfootfwd #bailout #economics

  19. Tanya Bay

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  20. Norman Fraser

    RT @leftfootfwd: The ‘Big Five’ banks’ private welfare state http://t.co/qZx8qHq The taxpayer's annual subsidy of $46 billion revealed.

  21. bobthomson70

    Free markets my arse RT @leftfootfwd: The ‘Big Five’ banks’ private welfare state: http://t.co/F1AGhea by @TheNewEconomics’ @LydiaPrieg

  22. Tim Sharp

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  23. Tony Greenham

    RT @leftfootfwd: The ‘Big Five’ banks’ private welfare state http://t.co/Rwluio7

  24. Craig H.

    The ‘Big Five’ banks’ private welfare state: http://t.co/h9i48jD by @TheNewEconomics’ @LydiaPrieg

  25. The Big 5 banks’ private welfare state » Tax Research UK

    […] Lydia Prieg is a researcher at the new economics foundation (nef). She wrote this on the Left Foot Forward blog yesterday: […]

  26. Ugo Biggeri

    banche uk e sovvenzioni pubbliche
    Interessante rapporto
    “@leftfootfwd: The ‘Big Five’ banks’ private welfare state: http://t.co/tCghbJx"

  27. Mario Agostino

    banche uk e sovvenzioni pubbliche
    Interessante rapporto
    “@leftfootfwd: The ‘Big Five’ banks’ private welfare state: http://t.co/tCghbJx"

  28. Simon Bale

    The ‘Big Five’ banks’ private welfare state http://t.co/NdEgkdK via @zite #yam #in

  29. Simon

    http://t.co/aO9T5Qb
    Welfare system for the bankers

  30. Sarah Cardy

    http://t.co/aO9T5Qb
    Welfare system for the bankers

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