A Bank of England study of the implicit subsidy of banks finds that taxpayers are transferring significant resources to financial institutions.
Joseph Noss and Rhiannon Sowerbutts, two Bank of England economists, summarize their findings in a briefer article published on VoxEU.org, saying that estimates of the size of the subsidy for U.K. banks have ranged from 6 billion pounds ($9.4 billion) to as much as 100 billion pounds. (The two economists arrive at still higher potential costs, running to 120 billion pounds, in their study.)
The methods they use attempt to put a number on a taxpayer-borne cost that is not transparent, whether in the U.K., in peripheral European countries experiencing banking crises or in the U.S., where too-big-to-fail financial institutions remain controversial four years after Bear Stearns was not allowed to fail, but Lehman Brothers was.
Government support for banks has recently been a major issue with respect to peripheral Europe’s weakened financial institutions, like Spain’s Bankia. Spain borrowed 100 billion euros to recapitalize its banks, yet investors, far from being reassured, have actually shunned Spanish debt. Yields on Spain’s 10-year bond rose to new highs on Monday, reaching 7.28% before ending the day at 7.16%, a level economists generally view as unsustainable.