U.K. Banks’ Funding Gap May Force New Taxpayer Bailout

U.K. banks may need a new government- funded bailout next year as a 25 billion-pound ($39.5 billion) a month funding gap opens up, the New Economics Foundation said today.

Banks’ retail and investment-banking operations should be separated and those deemed too-big-to-fail should be split up, the NEF said in the report published today. The London-based research institute, which says it seeks “well being and environmental sustainability,” also lamented a “shocking” lack of information on the expenditure of 1.2 trillion pounds in previously committed taxpayer assistance.

“Based on Bank of England data, banks now appear to face a funding cliff,” according to the report’s authors, Andrew Simms and Tony Greenham. Today, banks have to borrow 12 billion pounds a month, a figure that will rise to 25 billion pounds a month next year as the government funding plans end, the report said.

“The public sector is likely, once again, to be asked to bail out the banks for the emerging funding gap,” according to the report’s authors.

Bank of England Governor Mervyn King said in February that his officials are working with the banks to ensure “we don’t suddenly face what is sometimes described as a cliff in which the funding just runs out.”

The central bank’s Special Liquidity Scheme, which allows banks to swap hard-to-trade mortgage debt for government bills, will not be extended, King said. The bank closed the program in 2009 and will hold the debt for as long as three years.

The British government has commissioned a report from John Vickers, an Oxford academic and former Bank of England economist, into whether lenders should separate their consumer and investment banking divisions. He will deliver his final report to Chancellor of the Exchequer George Osborne and Business Secretary Vince Cable in September.

“The public have already paid for the failure of the banks twice, first by bailing them out, and then by suffering a program of drastic cuts to public services,” the NEF said. “We need urgent reform of the banking system to ensure the bailed- out banks are not allowed to repeat their failures.”

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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