A paper published by the Bank argued that major banks and their investors would have received the subsidy by benefiting from the state guarantee that large institutions would not be able to fail. As such, the financial system was being “distorted”.
One of the major benefits to banks was lower borrowing costs, because the paper argues that without Government backing they would be considered a far riskier, and therefore costlier, investment.
The subsidy could prove controversial because it has allowed banks to generate profits and pay at levels they would otherwise have been unable to.
The paper, written by Joseph Noss and Rhiannon Sowerbutts of the Bank’s financial stability division, also concluded that bailouts could raise the likelihood and cost of future crises, by allowing banks to take greater risks.
“ The implicit guarantee reduces market discipline, which distorts banks’ risk-taking incentives as investors no longer fully price the risks they are aware the banks are taking, allowing banks to take more risk.
“A pernicious spiral can develop, where the existence of an implicit guarantee encourages banks to take more risk, raising the likelihood and cost of bank failure, thus increasing the subsidy.
“The resulting cost to society of financial crises, not least the reduction in GDP, could far exceed the original implicit subsidy.”
The authors said that while it was difficult to quantify the implicit subsidy received by Britain’s banks during the crisis, the Bank had estimated it at £100bn in 2009. For 2010 it said estimates varied from £30bn to £120bn, depending on the methodology used .
“All measures point to significant transfers of resources from the government to the banking system,” they added.
The Bank has long warned of the burden to the taxpayer of having financial institutions that are deemed “too big to fail” .
The Bank’s Governor, Sir Mervyn King, addressed the idea in his BBC Today Programme Lecture this month. “In good times, banks took the benefits for their employees and shareholders, while in bad times the taxpayer bore the costs. For the banks, it was a case of heads I win, tails you – the taxpayer – lose.”
Statistics: Posted by yoda — Mon May 28, 2012 12:35 pm
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