Bank Bailouts: the UK Version

From a blog entry by Martin Wolf at the Financial Times:

The UK government looks increasingly like a python that has swallowed a hippopotamus. In acting as insurer of last resort to the British-based banking system, it is taking on huge risks on behalf of taxpayers. If this turned out to be a global depression, with huge losses for British-based banks, fiscal solvency might even come into question. Can this make sense? I doubt it.

At the end of last year, total assets of the British-based banking system were £7,919bn ($11,188bn, €8,908bn) or 5.5 times gross domestic product. These aggregate assets increased by £956bn between the end of 2007 and the end of 2008 and by £4,493bn, or by 130 per cent, between the end of 2001 and the end of 2008. Royal Bank of Scotland alone accounted for 45 per cent of this latter increase. At the end of last year, RBS had the largest assets of any British bank, at 166 per cent of GDP. These asset positions are enormous. It should be noted, however, that they include gross derivatives positions (which is not the case under US accounting). Net derivatives exposures were far smaller.

RBS was a small Scottish bank that wanted to be big. It succeeded. Yet, today, the market capitalisation of RBS is a mere £9bn. ...

Implicitly, the UK government is guaranteeing the liabilities of the swollen UK banks. Explicitly, it seems likely to guarantee at least £600bn of toxic assets of RBS and Lloyds under its “asset protection scheme”. I am no populist. Yet when I think of the sums earned by those responsible for dumping this mess on to the UK taxpayer, even my blood boils. ...

The UK government has to make a decision. If it believes that costly bail-out must be piled upon ever more costly bail-out, then the banking system can never be treated as a commercial activity again: it is a regulated utility – end of story. If the government does want it to be a commercial activity, then defaults are necessary, as some now argue. Take your pick. But do not believe you can have both. The UK cannot afford it.