Government won’t turn its back on failing banks

The government cannot walk away from failing banks in the future without risking wider contagion to other lenders, according to Standard & Poor’s.

In a report published last week, the ratings agency says it continues to factor in the likelihood of government support in a crisis when rating systemically important UK banks, despite government promises that taxpayers would not have to foot the bill for failing banks again.

Giles Edwards, primary credit analyst at S&P, says: “We believe that in practice the government cannot yet walk away from these institutions without risking a failure of one bank spreading across the system, disrupting the supply of credit to households and businesses.”

S&P says that it expects to continue to factor in government support when rating banks for at least the next two years.

While it acknowledges the situation could change after this due to legislation such as that recommended by the Independent Commission on Banking coming into force, it says such measures seem unlikely to prevent a future crisis.

Edwards says: “We believe banking is an industry prone to crisis and that crises will likely happen again.

“Today, we remain unconvinced that a government would always risk the potential adverse economic consequences of allowing a major financial institution to default.”