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Why taxpayers should seek a high price for helping out the banks

7 Oct 08

Last week, huge sighs of relief followed the US House of Representatives’ vote in favour of president Bush’s bank rescue package. The trouble is, it does not seem to have done much to reassure troubled markets around the world.

Over the weekend we saw confusion reign as the European Union’s leaders failed to come up with a coherent stance on how to restore confidence in banking. A controversial guarantee form the Irish government on all deposits in the country’s leading banks, and ambiguous comments from German chancellor Angela Merkel, have only served to muddy the water still further.

Last night, representatives of the leading UK banks met with chancellor of the exchequer Alistair Darling, Bank of England Governor Mervyn King and Lord Turner, chairman of the Financial Services Authority. The banks have since categorically denied that they came begging for an injection of capital, although they were reportedly “disappointed” that no detailed US-style rescue plan was placed on the table.

The banks are certainly facing some serious problems, most relating to confidence. Individual depositors need to be reassured that their savings are safe, hence the scramble under way in Europe for each country to promote its banking system as safer than the others.

The banks also, even if technically well capitalised, are struggling against the perception that they are not. That’s more of a problem in the short term than the issue of depositors’ protection, which is why they are looking to central banks and government treasuries to bail them out.

How much this is going to cost us all in the long run is impossible to say, but the banks have to realise that getting political commitment to a bailout is going to cost them heavily. In the US, help for homeowners and small businesses, restrictions on “fat cat” pay and a promise to recoup the long-term costs back from the financial sector had to be included before the package of proposals went through.

Similarly, in the UK the banks need to be aware that their “disappointment” will only be seen as arrogance in the face of a situation that most people see as of the banks’ own making.

Any solution involving more public money is going to have to include something for individuals and small business; a promise of better regulation to prevent a repeat of the debacle; and a potential upside for the Treasury if, or when, the upturn comes. This can’t just be about “privatising profits and nationalising losses.”

Banks are well known for exacting a high price when their customers are in financial trouble. They can’t expect it will be any different when the boot is on the other foot.

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banks | credit crunch | chancellor
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