Tuesday, 6 January 2015

Does Mark Carney intend removing all bank subsidies?

Mark Carney (governor of the Bank of England) gave the impression he favours removing all bank subsidies in this speech at the end of last year. In particular, he said:

“Banks were in receipt of large public subsidies. In Brisbane we reached a watershed in ending too big to fail, with agreements to take forward proposals on total loss absorbing capacity for globally systemic banks. Globally systemic banks that fail will in future be resolved without recourse to the taxpayer and without jeopardising financial stability.”

Now there is a problem there, namely that the TBTF subsidy is not the only bank subsidy. There is also deposit insurance which in the UK is provided free of charge to depositors thanks to the ever generous taxpayer. Plus there is the lender of last resort facility which is supposed to offer loans as prescribed by Walter Bagehot, namely at “penalty rates” and in exchange for first class collateral. In contrast, during the recent crisis, loans were offered at FAVOURABLE rates not penalty rates, plus some of the collateral was of questionable quality. So effectively lender of last resort is a bank subsidy. But let’s concentrate on deposit insurance.

In the UK, the muddle in high places is nicely illustrated by an advert which appears every day on one of my local radio stations (Smooth radio). The advert tells listeners that bank accounts are guaranteed by government, and at no cost to depositors. But it doesn’t say anything about this generosity being removed at any stage. And nor does Mark Carney’s above speech.

So do the authorities in the UK intend removing banks subsidies or not?


You might think that removing that subsidy wouldn’t be too difficult in that in the US there is the Federal Deposit Insurance Corporation which is a self-funding insurance system for banks. That would dispose of the UK’s subsidised insurance system.

But the trouble is that FDIC only covers small banks. Reason is that there’s only one institution that can rescue large banks, or a series of large banks, and that is government.

But there is a problem with having government insure depositors with the costs being covered by some sort of premium: it’s that politicians, thanks to populist pressures, would be tempted to cut the premiums to unrealistically low levels. Indeed, politicians are doing that right now in the UK: the “premium” (as mentioned above) is zero!

Political factors.

Obviously one important reason for not removing the deposit insurance subsidy in the UK is the public outcry that would ensue: once the plebs have been supplied with bread and circuses for a while, they react violently if free bread and circuses are removed. Thus if Mark Carney were to admit that the deposit insurance subsidy makes no economic sense, but that the reasons it will probably stay are political, then that would be a step forward. But Carney (along with the rest of the elite) don’t even seem to understand the latter point: that is, it’s debatable as to whether they even understand that deposit insurance as set up in the UK is a subsidy of banks.

Or perhaps they do understand the latter point, but don’t want to be aroused from their slumbers, i.e. don’t want to face all the hassle that would stem from admitting the point. Mustn’t rock the boat, must we chaps, especially when the existing system offers us extremely well paid employment and comfortable pensions.


  1. Perhaps some numbers would help to elucidate the scale of these important issues, and maybe also to arouse the elite and/or the plebs.
    In particular what are the best estimates of the magnitude of subsidies for:
    a) Too Big To Fail
    b) Lender of Last Resort
    c) Deposit Insurance
    Are there any such estimates?

    1. I've seen estimates for a, but not b or c. Cheers


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