By Max Clarke

"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," begun Margaret Hodge MP, Chair of the Committee of Public Accounts at a speech marking the launch of a report entitled Maintaining financial stability of UK banks: update on the support schemes.

"There must be an end to the dependence of the banks on taxpayer support,” concluded Hodge.

In 2007, following the crisis in the financial markets, the Treasury intervened to protect depositors and stop financial instability spreading. This included nationalisation and lending to troubled institutions and to the Financial Services Compensation Scheme, the purchase of a large number of shares in RBS and Lloyds, establishing sector-wide schemes to guarantee banks’ debt-funding and protect their assets, and indemnifying the Bank of England against losses for providing temporary liquidity.

These moves, the report found, were justified at the time, but the peak of the financial crisis has passed, and banks must not remain dependent on taxpayer support indefinitely. Although the level of explicit support has gone down from nearly £1 trillion to £512 billion, the Treasury still retains the ultimate risk of supporting banks should they again threaten the stability of the overall financial system. The options available to deal with a failing bank are still not able to pass the costs of failure to the shareholders and creditors instead of to the public purse.

Whether or not the taxpayer obtains value for money from exiting from the support depends heavily on a successful sale of the shares in RBS and Lloyds. The value of the shares at the time we took evidence was still some £8.4 billion below the price paid by the taxpayer. The scale of the government shareholding is far greater than in previous share sales and will require extraordinarily careful handling to protect the taxpayers' interest.

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