As banks’ profits surge, it’s time for them to stand behind their embattled borrowers

Bailouts, subsidised loans and more. No wonder RBS and Lloyds are reporting bumper profits. As the pandemic leads to defaults on mortgages, James Moore says that taxpayers are entitled to ask the banks to support them

Profits have surged at NatWest following the release of pandemic-related reserves (PA)

NatWest boss Alison Rose talked of “reasons for optimism” as the state-backed bank she helms followed Lloyds in turning on the taps to release some of the vast sea of money set aside to cover bad loans. 

While the former Royal Bank of Scotland’s results weren’t as well received as those of its rival lender, the return of £102m of its reserves nonetheless contributed to an 82 per cent surge in first-quarter profits, which came in at £946m, with the prospect of more to come.

It isn’t just the backing of the state that NatWest will have on that journey. There’s what amounts to a hefty state subsidy in there as well, something that’s also true of Lloyds, which the government also bailed out during the financial crisis, and the other big banks that received plenty of indirect support to keep them going.

They’ve all been able to make a return on the loans to businesses that the government is standing behind should they go bad. Taxpayer-backed loans for first-time buyers have been added to the mix. 

There is absolutely no justification for the latter, as I noted last week. Previous help-to-buy schemes only served to fuel an already overheated housing market and there’s no reason to think this one will be any different despite some new branding – it’s called the mortgage guarantee scheme this time around. Snappy. 

There’s a different calculus at work when it comes to the various state-backed business loans, designed and implemented amid the heat of the pandemic. 

They were designed to get money out fast to struggling and shuttered firms and may help to save some from going under, preserving jobs and livelihoods in the process, while helping to keep the economy from falling into a pandemic-created pit far deeper than the one it’s already in.

But as the banks start to benefit, if not from the green shoots then at least from the wolves failing to bite down as hard as had been feared, it’s fair to ask a question: are we taxpayers going to be asked to chip in to the banks’ coffers every time there’s an economic crisis, including those they cause (as happened last time)? 

One banking source I put this to said their institution wasn’t making much off the business loans, and that may be true. But even if it is, their bank will still make some level of all-but-risk-free privatised profit, with losses largely nationalised. 

Privatised profits and nationalised losses: that is something else that dates from the last great economic disruption. Did I mention that it was caused by the banks? I think I did. 

At the very least, there’s a debate to be had about whether the taxpayer standing behind these loans should be entitled to a greater share of what money is being made from them. Bear in mind that when they start going wrong, and it’s a sad fact that many will, the bill could prove to be quite steep.

This may not be an argument that’s getting much air at the moment, but I imagine that could change after several quarters’ worth of bumper profits for the banking industry because even as the taxpayer-funded recovery heats up, the Treasury’s bills will inevitably start rolling in.

There may yet be a way to appease the industry’s critics, a solution of sorts to the problem of those privatised profits and nationalised losses the banking industry has been benefiting from. 

It is to demand that they play nice when the government withdraws the support it has afforded to individuals, and the economic fallout from the pandemic becomes properly visible as they start defaulting on their loans. This will, obviously, include their home loans, with terrible consequences up to and including repossession and homelessness.

In many cases, people will end up in default through no fault of their own. 

It’s true that the handling of distressed home loans has improved greatly over the last three or four decades, through the efforts of regulators and others. That said, given the unprecedented circumstances and the effective subsidies the banks have been receiving from the government, there is room to ask for more.

Taxpayers have been forced to stand behind the banks time and again. Surely it’s time for the banks to return the favour.