The Implicit Subsidy of Banks

Abstract

This paper examines the implicit subsidy of UK banks by the government and the associated distortions in the financial system. It explains why the subsidy arises, why it is a public policy concern and explores how it can be quantified.

Quantifying the implicit subsidy to banks has generated considerable interest over recent years. The numbers are striking, both in their sheer scale, but also in their variation. Estimates of the implicit subsidy to major UK banks vary from around £6 billion (Oxera (2011)) to over £100 billion (Bank of England (2010)). This paper explains the divergence between these estimates, examines their dependence on differing underlying assumptions, and proposes a new alternative means of quantification.