"In a report published today, the CPS says that the system, which has operated in the UK since 1979, has increased “moral hazard” in the banking industry by making lenders lax about their risk assessment and enabling them to access cheap funding from investors who believe that failing banks will be bailed out by the government.
Andreas Wesemann, author of the CPS report and a partner at Ashcombe Advisers, a corporate finance boutique, argues that insurance creates a “veil of ignorance” about what is really at risk. The idea that the FSCS, which can levy up to £1.5 billion annually from banks, “can fund uncapped losses at no cost to us or the economy as a whole . . . is an illusion”, he said.
The government spent more than £20 billion nationalising or bailing out five banks in 2008, including Bradford & Bingley and Icesave. Virtually all this cost was funded by borrowings from the Bank of England and ultimately the Treasury, Mr Wesemann said."
To read the full article, visit The Times website.