“Too big to fail” era over for banks, promises Bank of England

HE era of “too big to fail” banks going bust and being bailed out by the public is over, the Bank of England claimed today, while warning that three major lenders still have short comings.

Lloyds, Standard Chartered and HSBC were told to improve their so-called resolution plans, a somewhat public rebuke. All three said they would do so.

Banks around the world went bust in the wake of the 2008 credit crunch, beginning with Lehman Brothers and Bear Stearns on Wall Street.

The contagion spread. In the UK Royal Bank of Scotland and Lloyds had to be bailed out at the cost of tens of billions of pounds each.

All banks took contributions from the taxpayer to stay afloat, if only indirectly.

That cloud has hung over the sector ever since with banks ordered to beef up balance sheets and come up with comprehensive plans for how they would cope if forced to wind themselves down.

Today, after years of work, the Bank of England said it is satisfied that the big banks are no longer “too big to fail”. They could be safely wound down while still keeping services open to customers. Shareholders, not taxpayers, would bear the costs.

That comes as a huge relief to the City and to the government. With talk of a recession growing, the Treasury would be alarmed if the Bank thought top lenders were at any risk of going under.

Dave Ramsden, deputy governor for markets and banking at the Bank of England, said: “Safely resolving a large bank will always be a complex challenge so it’s important that both we and the major banks continue to prioritise work on this issue.”

One City analyst likened the report today to an “after the horse has bolted” operation and warned that investors won’t back banks if they have to hold so much cash they can’t make profits.

Banks are coming under pressure from Boris Johnson to boost home-ownership by supporting new Right To Buy plans. There is also talk of the return of the 100% mortgage, loans deemed to be part of the problem when banks crashed last time.

Lenders have so far been supportive of the government plans.

Nationwide said: “As one of the UK’s largest mortgage lenders, we look forward to understanding more about the government’s ambitious announcement to extend right to buy to help those on benefits buy their first home, while ensuring that the sold stock is replaced. We are interested in hearing about all ideas aimed at making home ownership more accessible and affordable, particularly at a time when the cost of living continues to rise.”

NatWest said: “We welcome all measures that encourage sustainable and affordable home ownership and will engage fully with the detail of these proposals. We are supportive of the Right to Buy scheme and our affordability policies already enable customers to use a range of benefit income to support an application for a mortgage.”