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A £38bn ‘subsidy’ for Big Four hits small banks

Think tank warns reforms do not go far enough to tackle problems in the UK

Government support for Britain’s big four banks is effectively a taxpayer-subsidy of almost £40bn that leaves challenger banks with no room to compete. The claim comes in a shock report published today by the think tank, the New Economics Foundation.

It reckons that Barclays, RBS, HSBC and Lloyds enjoyed combined savings of £37.7bn because financial markets deem them too big to fail.

The news comes as banks look set to face the most sweeping reforms in more than a generation as the House of Lords gathered for urgent discussions on the Banking Reform Bill last night.

The Bill is set to create a “ring fence” around retail banks to protect them from risky investment banking. But Tony Greenham, the head of finance and business at the New Economics Foundation, said today’s report suggests the reforms will not go far enough.

“Each year big banks save billions of pounds because financial markets believe they are too big to fail,” Mr Greenham said. “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.”

The main problem is that the big four banks can access funding at significantly lower interest rates than other firms and their competitors, claims the report. The lower rates are an implicit government subsidy, NEF claims, as credit ratings agencies perceive taxpayers will bail out big banks in the event they run into difficulty.

Without the subsidised borrowing rates of the Big Four, smaller banks and new competitors effectively have little chance of breaking the virtual monopoly which government support gives Barclays, RBS, HSBC and Lloyds. “This creates a clear barrier to entry for new competitors and discriminates against smaller banks,” the report says.

Barclays has gained the biggest advantage from the so-called Too-Big-to-Fail subsidy in the past year, benefiting by £11.7bn, a rise of 17.6 per cent over the previous year.

RBS was close behind, gaining £11.5bn, while Lloyds Banking Group’s share was £9.7bn. HSBC only gained £4.7bn through the effective subsidy.

The research looked at other sectors of the economy and found no sign of similar subsidies meaning the Too-Big-to-Fail subsidy is unique to  large 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,” said Mr Greenham.

“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.”