A bank bailout is when a bank receives money from the government to stop it going bankrupt. Perhaps the most notable case was the bailout of RBS in the UK in 2008. The government bought a large share in the bank for £45.5 billion of taxpayers’ money. Ten years later, this money has still not been fully recouped.
The money given to RBS was facilitated by a share purchase by the government, making the taxpayer the largest shareholder in the bank with 58% of it. The government’s ownership of normal shares eventually went up to 71% before falling back down to 62% in 2018.
The result of the bailout meant taxpayers effectively owned the bank, its debt, its liabilities and its toxic assets and all the risk that entailed. Because RBS has a share price lower than the bailout price, it has lost the government money. Shares have been sold back to the market for 330p and 271p respectively. In 2008 when the bailout began, £15 billion was spent on shares at 655p. Over the next ten years the bank lost £130 billion. (However, the UK government did make around £500 million from the sale of its stake in Lloyds bank.)
Bailouts are seen as controversial because they were seen as rewarding, or at least not punishing, failure. Although banks had acted recklessly and without the prudence expected of them, they were given money to survive, the argument being that many customers could potentially lose their savings if the bank was not kept solvent. This gave rise to the concept of a bank being ‘too big to fail’, implying, in part, that if a bank is poorly managed enough and it owes enough people money, it can rely on the government to save it.