UK banks' funding gap may force new taxpayer bailout
Lenders must borrow £25bn a month when aid plan ends
Published 05/10/2010 | 05:00
UK banks may need a new government-funded bailout next year as a £25bn (€28.9bn) a month funding gap opens up, the New Economics Foundation said yesterday.
The independent New Economics Foundation (NEF) thinktank said it had examined Bank of England data and concluded that many UK banks appeared to face a funding cliff, as it published a report on Britain's banks entitled "Where Did Our Money Go?"
Banks' retail and investment-banking operations should be separated and those deemed too-big-to-fail should be split up, the NEF said in the report published yesterday.
The London-based research institute, which says it seeks "well being and environmental sustainability," also lamented a "shocking" lack of information on the expenditure of £1.2 trillion in previously committed taxpayer assistance.
"Based on Bank of England data, banks now appear to face a funding cliff," according to the report's authors, Andrew Simms and Tony Greenham. Banks had to borrow £12bn a month, a figure that will rise to £25bn a month next year as the government funding plans end, the report said.
"The public sector is likely, once again, to be asked to bail out the banks for the emerging funding gap," according to the report's authors.
Bank of England Governor Mervyn King said in February that his officials are working with the banks to ensure, "we don't suddenly face what is sometimes described as a cliff in which the funding just runs out."
The central bank's Special Liquidity Scheme, which allows banks to swap hard-to-trade mortgage debt for government bills, will not be extended, King said.
The bank closed the programme in 2009 and will hold the debt for as long as three years. However, UK Finance minister George Osborne dismissed the thinktank report.
Royal Bank of Scotland and Lloyds had to be part-nationalised as they ran up huge losses during the credit crisis, and others, such as Barclays and HSBC, have benefited from cheap credit provided by the central bank.
The British government has commissioned a report from John Vickers, an Oxford academic and former Bank of England economist, into whether lenders should separate their consumer and investment banking divisions.
"The public have already paid for the failure of the banks twice, first by bailing them out, and then by suffering a program of drastic cuts to public services," the NEF said. "We need urgent reform of the banking system to ensure the bailed- out banks are not allowed to repeat their failures."