The taxpayer subsidy to British banks is "considerably" more than £10bn, the Independent Commission on Banking told a Treasury Select Committee yesterday.
The commission revealed that the subsidy meant taxpayers indirectly financed some of the highly criticised bankers' bonuses. Sir John Vickers, chairman of the ICB, said: "Our view is [the subsidy] is considerably in excess of £10bn."
During the three-hour meeting, he said public anger about banks was understandable because some bonuses had been paid as a result of taxpayer subsidy. "Some of those working in banks have been extremely handsomely rewarded by way of bonuses," Sir John told the select committee. "Some of the bonuses have been financed that way."
He also warned that there might be no end to taxpayers subsidising the bank. "Total abolition is unlikely, there are always going to be some circumstances in which government would feel compelled to come to the rescue of some parts of banks. The aspiration of getting it to zero point zero is unrealistic," Sir John said.
He also reinforced demands made in the ICB's interim report that Lloyds Group be forced to sell more than the 600 branches it has currently agreed to divest under European state aid rules. "We take the view that the scale of the divestment arising from the state aid is not adequate to create a vibrant competitive force," said Sir John, a former director general of the Office of Fair Trading and chief economist at the Bank of England.
He added that the ICB hoped for "positive developments from the parties concerned" before releasing its final proposals in the autumn. "We are extremely interested to see what, if anything, might happen in the coming months before our final report," he said.
He said it was unfortunate that the merger between Lloyds TSB and HBOS had been allowed. "It's very regrettable that it happened and was allowed to happen," Sir John said. "The important thing was to split good and bad assets and unfortunately they got plugged together because of that merger."
In an indication of how hard-hitting the commission's final report may be, Sir John called for "much stronger supervision" of banks. "There needs to be much-improved risk-weighting and much stronger supervision than we've seen in the run up to the crisis," he said. Sir John said the commission had no part in the Project Merlin talks with banks aimed at boosting business lending. It was revealed earlier this week that the major banks failed to meet lending targets under the agreement. "We were absolutely not part of the Merlin discussions, which were between the government on the one hand and the banks on the other," he said.
Fellow ICB board member and former Barclays boss Martin Taylor told the select committee the ICB wanted to encourage lending, but recognised the difficulties in opening a retail bank in the UK. "We want a risk-taking banking industry, we want lending to small businesses," Mr Taylor said. "It's tricky to start a retail bank, the systems are costly, you need distribution," he added.
The commission was created by George Osborne last June and charged with investigating the UK banking sector. It published its interim report last month, which recommended that the banks' retail businesses be ring-fenced from the so-called casino banking to protect savers and borrowers in the event of a future crisis. It also said banks should put more capital aside to prevent future taxpayer bailouts.
The ICB will meet the banks again in June and is due to make its final recommendations to the Chancellor in September.