UK banks 'getting billions in hidden subsidies'

Canary Wharf The banks could recapitalise by cutting bonuses and dividends, according to the NEF report

UK banks are getting tens of billions of pounds in "hidden subsidies" from taxpayers and customers on top of direct state support, a report says.

The biggest subsidy, worth possibly £30bn a year, comes from the state standing behind the banks, the New Economics Foundation (NEF) has said.

Increased interest rates to borrowers amounts to another £2.5bn a year.

But the British Bankers' Association (BBA) said the financial services industry paid £54bn in tax in 2010.

Cheap money

The NEF, an independent economic think-tank, has said the banks received £1.2tn in support during the financial crisis.

This equates to 85% of the UK's national income in 2009, it said.

The biggest continuing support is what the think-tank called the "too big to fail" subsidy.

This is the "huge commercial advantage" gained by banks from the implicit guarantee provided by the government that it will not let banks go bust.

Start Quote

The taxpayer is subsidising the banks twice over”

End Quote New Economics Foundation

This means banks can borrow money much more cheaply than would be the case if the government did not provide this guarantee.

"It means that bonuses to senior staff for 'performance' and dividends to institutional investors are at least in part a straight transfer from the taxpayer," the report says.

NEF said a "conservative estimate" put this subsidy at £30bn a year.

This is considerably less than the £100bn the Bank of England estimated the value of tacit government support for the the UK's four biggest banks - Royal Bank of Scotland (RBS), HSBC, Lloyds Banking Group and Barclays - was worth in 2009.

The Bank arrived at this figure in December last year by comparing the rates the banks borrowed at with government support against those they borrowed at without its support.

But the BBA said the "too big to fail" argument was no longer relevant.

The government and the banks have said that "no bank should rely on the taxpayer again, and the Banking Act 2009 was designed to ensure there would be procedures for recovery or resolution if banks face failure," it argued.

'Significant windfall'

The second major subsidy is provided by the Bank of England's quantitative easing (QE) programme, said the NEF.

This effectively creates money to pump into the economy to try and boost demand.

The mechanism through which the bank does this is by buying bonds from banks.

"Merely for being passive conduits for this risk-free arrangement, the banks took a cut of every trade," the NEF said.

This amounted to a "significant windfall" for the banks, it argued.

The BBA said the means by which money gets into the real economy through QE "is neither passive nor risk free".

The third subsidy, said the NEF, comes from increasing the gap between the rate at which the banks borrow money, and the rate at which they lend it.

The NEF said the banks had done this in response to calls from the government to lend more - at the same time as building up their capital reserves.

But the think-tank said the banks could rebuild their reserves by reducing or "eliminating" bonuses and dividend payments instead.

"As it is, the taxpayer is subsidising the banks twice over: once through taxpayer funded public support to the banks, and secondly through paying much higher interest to borrow than the banks do," the report said.

Again the BBA rejected NEF's argument, saying that "the banks which have received support will repay the taxpayer".

It added: "Holding more capital and cash reduces the amount available to lend. This has an impact on the interest rates banks offer on loans and savings."

Lending deal

The government provided hundreds of billions of support to UK banks, both directly and through insurance schemes, during the financial crisis.

This included taking large stakes in both the RBS and Lloyds.

Many analysts believe, however, that the government will make a profit when it sells its stakes in both these banks.

Last week, the banks also agreed to lend more money to small and medium-sized businesses - about £190bn this year - and curb bonuses, as well as reveal some salary details of top earners.

The government also increased a levy on banks to £2.5bn this year - raising an extra £800m.

However, banks are still expected to pay out bonuses totalling about £6bn this year.

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