British banks still pose a big risk to public finances and must end their dependence on taxpayer support, a report by lawmakers said on Wednesday.
Britain spent billions of pounds propping up banks such as RBS <RBS.L> and Lloyds <LLOY.L> during the credit crunch, and ministers are now mulling how to protect taxpayers from future financial crises, potentially by ringfencing some banking operations. "The peak of the financial crisis may have passed but taxpayer support for UK banks remains extensive and the risks to the public finance from the banking sector are great," said Margaret Hodge, chair of parliament's Committee of Public Accounts.
"There must be an end to the dependence of the banks on taxpayer support."
An independent, government-sponsored banking commission has recommended that retail operations at banks should be ringfenced to stop banks from being deemed too big to fail.
The commission is due to offer final recommendations later in the year, which the government will then consider, but Hodge warned against any delay in shoring up the industry.
"Those banks that have not received capital cash injections from the government still benefit substantially from an implicit expectation of taxpayer support," she said.
"Currently, the arrangements available for winding-up failing banks would not be able to cope with the failure of a major bank. There is still no way to avoid the taxpayer having to bear the cost of any such failure." The committee, in its report on financial stability, urged the Treasury to continue to remove support in an orderly way and said it was "inappropriate for banks dependent on taxpayer support to be generating excessive incomes, unnecessary bonuses or dividends".
The government thrashed out a deal with banks earlier this year in an attempt to curtail bonus payouts and boost lending to small companies.
The so-called Merlin talks were criticised by trade unions and opposition politicians for not going far enough at a time when many public sector workers are having to bear the brunt of deep spending cuts to tackle a record budget deficit, which ballooned during the financial crisis.
"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," the committee said.
