Conclusions
and recommendations
- Banks should not be dependent
on taxpayer support. We
are encouraged that the level of explicit support provided to
the banks has decreased from nearly £1 trillion to £512
billion by December 2010. The Treasury must continue to manage
down the explicit support and work towards a financial system
where risk is borne solely by investors.
- Whilst parts of the banking
industry believe that the time for remorse is over, so long as
banks are "too big to fail" there remains an implicit
expectation of taxpayer support.
This provides a very significant implicit subsidy for important
banks, which, the Bank of England has estimated, could be as high
as £100 billion. Currently the options available for winding-up
failing banks would still not be able to cope with the failure
of a major bank, and there is no way to avoid the cost of such
a failure being borne by the taxpayer. Although the risk of such
a failure has reduced since 2008, the Treasury must maintain momentum
for international reform in this area. It should also continue
to work with the Bank of England to develop a credible resolution
regime capable of handling the failure of a systemically important
bank.
- The Treasury is providing
a subsidy of at least £1 billion through the Credit Guarantee
Scheme. We accept that
such subsidies were initially necessary to support the banks,
but it is now time to ensure the taxpayer is adequately compensated
for the support provided. The Treasury should look for ways to
ensure that banks are not paying bonuses or dividends at the expense
of repaying the subsidy. The fees for the Credit Guarantee Scheme
should be reassessed and revised upwards where necessary.
- Unless banks can replace
taxpayer funding with alternative sustainable funding over the
next two years, the Government may still be called on to provide
additional support.
Stability depends on banks exiting the support schemes in an orderly
fashion. Banks are on track to achieve this, but the next two
years may be challenging. The Treasury, working with the Bank
of England, must continue to encourage a smooth and timely run-down
of the Credit Guarantee and Special Liquidity Schemes. In addition
it should continue to develop its contingency plans for managing
an orderly transition to full private funding.
- Despite our previous recommendations,
the Treasury has not yet captured the experience and lessons they
have learned from the interventions.
The Treasury should therefore conduct an interim lessons learned
exercise now, to ensure that institutional knowledge is retained.
- The value for money of removing
the explicit taxpayer support will be highly dependent on the
Treasury's handling of the sale of the shares in RBS and Lloyds,
a sale far greater than any previous privatisation.
The Treasury also has to balance the need to make a profit for
the taxpayer with its wider responsibilities for financial stability
and promoting competition. The Treasury has not yet set out its
plans for the sale but should continue to work with UK Financial
Investments to ensure an orderly programme of disposals.
- It is inappropriate for
a bank dependent on taxpayer support to be generating excessive
incomes or dividends at the expense of exiting public support.
We recognise that banks with significant state ownership still
need to pay competitive remuneration to retain their staff, but
only if this contributes to the value realised on exit from taxpayer
support. The Treasury must explore all avenues to ensure that
the remuneration packages for the part-nationalised banks provide
value for money for the taxpayer, and properly reflect the burden
on the taxpayer of continuing support.
- It is still not clear how
the Treasury will manage its competing objectives of maintaining
financial stability, promoting competition and realising the value
of the taxpayers' investments.
Until the Government has responded to the Independent Commission
on Banking, this uncertainty will remain. In formulating its response
to the Commission, the Treasury will need an explicit framework
for how it will manage these competing objectives. It should analyse
the costs and benefits of options for the size and shape of the
banking industry, and quantify the value it places on each of
its objectives.
- The taxpayer will have to
pay £5 billion a year in interest on the money borrowed to
finance the support.
This is a material amount, and should be reflected in future assessments
of the total cost of the interventions.
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