How a bank like Barclays makes us pay

Comment is free || Tony Greenham

Barclays avoided nationalisation during the crisis, but like other banks it profits from hidden subsidies

When Barclays turned to Qatar, Abu Dhabi and China in 2008 to shore up its balance sheet, rather than the UK government, did it have half a mind on future results announcements and bonus rounds such as the one we’ve just had? It would have been easy to guess that generous bonuses at taxpayer-owned banks would be controversial. Perhaps chief executive Bob Diamond thought it had avoided this potential bear trap by looking east for new capital instead of to Westminster, and that is why he was unwilling, under prompting from the Treasury select committee, to offer his thanks to UK taxpayers.

He did concede that Barclays benefited from the system as a whole being bailed out with taxpayer support. But is there more to the story than this? What if Barclays’ profits are propped up in other ways by taxpayers and swollen by lack of real competition?

Banks make too much money. Of course banks need earn a reasonable return, but we at Nef (the New Economics Foundation) have set out several ways in which banks profit excessively at the expense of taxpayers, customers, investors and corporate clients. Not only is this bad news for the broader economy, but it also calls into question whether the extraordinarily high levels of “performance-related” pay in the banking industry are quite so performance related.

The free-market theory is that excess profits are competed away, yet since the great neoliberal experiment of laissez-faire banking began in the 1970s,banks’ profitability has more than doubled and has outstripped non-financial sectors. Why?

To start with, being “too big to fail” is profitable. Based on calculations by Andrew Haldane, the executive director of financial stability at the Bank of England, we estimate the value of this subsidy to UK banks to be around £30bn a year. The subsidy arises because banks, effectively guaranteed by the government, are able to access much cheaper wholesale funds than would otherwise be the case.

But this is far from the end of the matter. We also identified windfall profits to banks from the additional trading in gilts required by the Bank of England’s programme of quantitative easing. This is ironic to say the least, as QE was brought in to revive the economy after a banking crash.

Customers are proving a good source of profits, too. The interest spread – the difference between the interest rate that banks pay for funds and how much they charge us – has widened dramatically since 2008. Although arguably too narrow before the crash, this suggests that the burden of rebuilding banks’ balance sheets is falling disproportionately on customers instead of shareholders, executives and bondholders.

Institutional investors and corporate customers are also getting a raw deal from investment banks. In the case of rights issues we identify a near trebling of investment banking fees since 2000, having been at a steady level for decades. This has reaped an additional £1bn in fees just through a rise in commission rates.

The British Bankers’ Association likes to assert that banks create wealth. This is stretching the meaning of the phrase to breaking point. Banks are intermediaries between wealth creators and investors, and the higher their cut the bigger the drag on wealth creation in the real economy. This is far from underplaying the importance of banks; theirs is a vital role for economic health. But as with all other vital support services (including public services), we need them to offer high levels of customer service at the lowest possible cost, not the other way round. If these hidden subsidies and causes of excess profits were eliminated, not only might we find the UK more prosperous, but we would also be likely to find that the source of the lavish and contentious bonus culture suddenly dries up. Not so much tough on bonuses, as tough on the causes of bonuses.


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