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Could a second banking crash be on the way?

Could a second banking crash be on the way?

Category: Banking

Updated: 04/10/2010
First Published: 04/10/2010

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

The spectre of the UK's high street banks asking for further hand outs could be on the horizon, a new report has claimed.

It is thought that at least £1.2 trillion of Government money has been pumped into the banking system since the outset of the troubles in 2007.

However, research conducted by the New Economics Foundation (NEF) has found that the banks face a funding gap that could hit £25 billion a month by next year, potentially speaking another bail-out funded by public money.

The banks are under pressure to increase their lending, while making sure they have more cash in reserve at any one time, as to avoid a repeat of the recent troubles.

Of the vast sums that have been pumped into the institutions since the economic crisis, the report found there to be a shocking lack of information about where the money has gone.

In addition, interest rates are higher than before the crisis for firms and households, including mortgage rates, despite the record low 0.5% base rate.

Lending to businesses and households has also dipped despite the bail-outs.

"The public have already paid for the failure of the banks twice, first by bailing them out, and then by suffering a programme of drastic cuts to public services to appease the financial market," said Tony Greenham, head of finance and business programme at NEF and co-author of the report.

"We need urgent reform of the banking system to ensure that bailed-out banks are not allowed to repeat their failures."

The NEF is calling for a raft of reforms, including:

· The separation of retail banking from speculative trading

· Breaking up the big banks to the point where a failure of one would not jeopardise the wider economy

· The transformation of the bailed-out Royal Bank of Scotland into a Royal Bank of Sustainability

which must redirect its investment away from fossil fuels and towards building green infrastructure.

"Now we desperately need a finance system that is fit for the purpose of serving a productive economy, and meeting urgent environmental and social challenges," said Andrew Simms, NEF policy director and co-author of the report.

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