High street banks are on the verge of another credit crunch and taxpayers may be forced to plug a £25 billion-a-month funding gap, an economic think-tank has claimed.
Faced with a huge financial black hole, the New Economics Foundation has said the banks could turn again to the UK government for support.
According to its report entitled “Where Did Our Money Go?”, an estimated £1.2 trillion of state cash has already been pumped into the banking system.
However, NEF has described a “shocking” lack of information about how that money has been used and demanded “urgent reform”.
The report warns that the industry is on a collision course for a severe funding crisis when current financial lifelines are withdrawn.
In particular, there are fears over the Bank of England’s Special Liquidity Scheme – a vital source of money since the credit crunch – which ends in 2012.
Despite the bleak claims, Chancellor George Osborne has denied Britain is heading towards a second credit crunch.
Speaking to Sky News, he said: “I am not expecting and have had no indication that any British bank needs any further support. The banking system in Britain is much more stable than the one in Ireland.”
The NEF wants a range of changes, including splitting retail operations from more risky investment banking and the breaking up of “too big to fail” players.
It comes against a backdrop of incoming regulation – such as the Basel III capital rules – that demand banks put aside more cash to boost their capital strength.
Calling for reform, Tony Greenham, head of the finance and business programme at NEF, said: “We are on the cusp of a second banking failure.
“The public has already paid for the failure of the banks twice – first by bailing them out and then by suffering a programme of drastic cuts to public services to appease the financial markets.”
A Treasury spokeswoman claimed the government had already taken measures to reduce risks posed by the financial sector and is pushing for global standards to help protect taxpayers.
She said: “We have introduced a bank levy designed to address systemic risk.
“We have also established an Independent Commission on Banking, which is considering measures to reduce systemic risk presented by large banks, while promoting competitiveness in the industry.”