Can the Government really bail out the banks?

Bachelorplace

After one of those horrifying YouTube videos explaining our depression, he argued that with the amount of debt the UK is in, the promise of protecting us if a bank goes bust is just a myth.

His argument is that if there is no way the government would find trillions more to bail banks out!!

Bachelorplace

There is an “if” in there that was a typo.

Thrugelmir

Banks undergo annual stress tests now. Far better health than back in 2007. Far smaller balance sheets as well.  Treasury can step in and inject cash for equity if need be. 

Notnewnotold

Well these days there is, at least in theory, ring fencing of retail banking for UK customers (including small businesses to a point). So your savings and current account with HSBC etc are,  again in theory, segregated from the rest of the bank's international and investment banking businesses.

Of course, while there are lots of rules around this, and they are tested from time to time, they have never actually been put into practice. And if a bank the size of HSBC really did go bust, the risk to savers in the UK would be a very small tip on a very big iceberg...

Gary1984

As I understand it the Bank of England can create enough money to help the government bail out any bank they want? 

Malthusian

After one of those horrifying YouTube videos explaining our depression, he argued that with the amount of debt the UK is in, the promise of protecting us if a bank goes bust is just a myth.

Was he selling Dogecoins by any chance?

The crash of 2008 illustrates that in the event that a bank collapses, the FSCS will step in. Bear in mind that

• At the time, FSCS protection was limited to 100% of the first £2,000 and 90% of the next £33,000. The FSCS ignored that and compensated everyone in full.
  
• The FSCS even bailed out people who left the UK banking system and put their money in Icelandic banks in the hope of higher interest, who should by rights have had to queue up outside the Icelandic compensation scheme.
  

I wouldn't count on the FSCS ignoring the limits again (the Government may well take the view that anyone rich and lazy enough to leave more than £85,000 in one bank cannot expect poorer taxpayers to bail them out). But the fact that in 2008 the FSCS not only paid out in full but went massively over and above what "in full" meant at the time, illustrates that the idea that it can't or won't do so again is an apocalypse scenario. It would require the UK economy to collapse completely.

Why would the Government need trillions to bail out the banks? Large tranches of debt is to the banks, not owed by.

dunstonh

There is also the ringfencing of retail banks that took place after the credit crunch.  This was to allow investment banks to fail without taking retail banks with them.