Banking system remains risky and uncompetitive, research finds

Britain’s banking system remains uncompetitive and risky because financial markets deem that the largest banks are too big to fail, according to the new economics foundation (nef).

The research found that the UK’s big banks, Barclays, Royal Bank of Scotland (RBS), Lloyds and HSBC, benefit from large implicit taxpayers subsidies, which amounted to £37.6 billion in 2012. These banks are able to access funding at significantly lower interest rates compared to their competitors.

Nef said, “Lower rates are an implicit government subsidy: credit rating agencies perceive taxpayers will bail out big banks in the event they run into difficulty.”

These subsidises give large banks an advantage and make it difficult for smaller banks and new market entrants to compete. The organisation added that the subsidies also increased a reliance on short-term and risky funding and masked the cost of inefficiency and excessive executive remuneration by “flattering the financial performance of banks”.

Remuneration at banks has hit the headlines recently after the EU has taken action to curb excessive bonuses. From next year bank managers’ remuneration cannot exceed 200% of their fixed salary.

A survey published this week also found that managing directors of firms in the City of London are expecting a 44% increase in their bonuses.

The Lloyds Banking Group faced criticisms in May after the chief executive was given a bonus of £1.4 million despite the bank making a loss.

Tony Greenham, head of finance and business at nef, said, “Each year big banks save billions of pounds because financial markets believe they are too big to fail. The size of these subsidies remain staggering, and suggests reforms have not gone far enough to tackle the problems in British banking.”

Despite receiving subsidies nef argues that the largest banks give little back to the economy. Under the Funding for Lending scheme, which allows banks to borrow money at reduced costs to fund specific types of loans, banks have drawn out £23 billion since July 2012 but have only increased their lending by £3.6 billion, according to nef calculations.

Lydia Prieg, researcher at nef, commented that the UK’s international competitors support healthy networks of local and regional banks.

“The benefits of a more diverse banking system are well-recognised around the world, but little has yet been done to address this gaping flaw in the UK economy. The government must seriously review how taxpayer-owned RBS could be used to create a network of local stakeholder banks,” she said.

Nef’s stakeholder bank report, published in March this year, looks at the challenges associated with stakeholder banks and what factors are needed to make them a success.

Further reading:

Survey says City workers predict bonuses will increase 44%

Banking regulator deals Lloyds record £28m fine for irresponsible sales culture

UK bankers are paid too much, says EU regulators

Performance vs. Pay: Should boardroom officials be rewarded regardless of their company’s success?

Report: City of London’s position as EU financial services hub ‘uncertain’