Financial institutions face a funding shortfall next year as existing borrowing ends, forcing them to look for another £13 billion a month, or £156bn a year, the New Economics Foundation (Nef) warned in a report into the banking crisis.
Banks were unlikely to make up the shortfall by making more money from customers and might ask for another bail-out, Nef suggested.
It called for wholesale reform including the separation of mortgages, current accounts and other high street banking from riskier investment banking and the transformation of the taxpayer-controlled Royal Bank of Scotland into a green bank investing in sustainable projects.
The British Bankers Association rejected the 88-report, entitled Where Did Our Money Go?, saying its members were “well capitalised” to weather any future financial storm.
The Government declined to discuss whether banks faced a funding shortfall but said the Coalition had introduced measures to “reduce the systemic risk the financial sector poses to the economy.”
All four main clearing banks – RBS, Lloyds, HSBC and Barclays – passed European Union “stress tests” carried out by the Financial Services Authority earlier this year.
Although some critics claimed the tests – which found problems at seven of 91 European banks – should have been more robust, the FSA said they demonstrated “the preparedness and resilience of the UK banks under unlikely adverse economic scenarios.”
Nef analysed public and high street banks’ financial figures for its report, which asked how the public had fared from the £1.2 trillion of public support for the economy following the financial crisis two years ago. Amid concern several banks were verging on collape, the Government nationalised Northern Rock and took stakes in the RBS and Lloyds-HBOS groups.
Warning of a potential “funding cliff” next year, Nef quoted the Bank of England’s Inflation Report last month, which said: “UK banks continue to face a number of challenges related in particular to their need to refinance substantial levels of maturing funding.”
Although the think-tank conceded it was difficult to estimate the extent of any funding shortfall, it predicted the banks would need an extra £13 billion a month in 2011, equivalent to £156 billion a year - £2,500 for every man, woman and child in the UK.
Co-authors Andrew Simms and Tony Greenham wrote: “Let us be clear. In order to support a banking system that is in aggregate withdrawing lending from the private sector, UK banks currently have to borrow £12bn a month. In 2011, they will have to borrow an additional £13bn a month.
“It seems unlikely that under such circumstances the economy will see an improved service from the banking system over this period. Indeed the taxpayers should be bracing themselves to provide additional loans.”
Nef said: “These figures raise the question of whether the Government is aware of the problem, and if so, whether the scale of planned cuts to public services is being influenced by the likelihood of another bail-out.”
It criticised the Government for “a shocking lack of information” about where the bail-out money had gone and noted that interest rates had risen for firms and households while lending had stagnated.
The think-tank called for retail and investment banking to be split and for the creation of smaller banks that could be allowed to fail without endangering the economy and that banks should be forced to invest in communities from which they take deposits through the introduction of a Community Reinvestment Act. It also suggested RBS, in which the taxpayer holds an 83 per cent stake, become a Royal Bank of Sustainability.
Mr Simms, policy director, said: “The worst of the banks were once compared to ‘vampire squids’ wrapped around the face of humanity, sucking money out of the economy to reward a few reckless speculators. Now we desperately need a finance system that is fit for the purpose of serving a productive economy, and meeting urgent environmental and social challenges.”
The British Bankers’ Association said UK banks had already begun to rebuild their businesses and exceeded international standards for capital and liquidity. A spokesman said: “They are well placed to weather any financial problems that may arise in the future.”
He added: “Not all banks in the UK received support from the Government. Those that did are paying commercial rates for it – it wasn’t a hand-out, a grant or a gift. And the Government still holds that investment that will eventually be sold off profitably.
“Breaking up banks isn’t the answer. Quite simply, big companies need big banks that can meet all their financial needs.”
The Treasury said it was reforming Britain's regulatory structure, including the establishment within the Bank of England a new Financial Policy Committee “in order to avoid a repeat of the financial crisis.”
“We have introduced a bank levy designed to address systemic risk,” it said in a statement.
“We have also established an Independent Commission on Banking, which is considering structural and non-structural measures to reduce systemic risk presented by large banks, while promoting competitiveness in the industry.
“We are fully engaged in the EU and international process of creating proportionate and well-argued regulation that will make the financial services industry more stable. We will continue to press for the full and consistent implementation of global standards to reduce risk to taxpayers.”
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