Britain’s quiet billion-pound subsidy to banks and ‘shadow’ banks

JULY 20, 2025

By Costas Lapavitsas

Rachel Reeves seeks cuts in public spending and considers tax increases because, apparently, the cupboard is bare. No fiscal space, we are told, to reverse years of social erosion. Yet in the background, one of the largest transfers of public wealth in recent British history continues apace—almost entirely out of sight.

The Bank of England’s Asset Purchase Facility (APF), a holdover from the era of Quantitative Easing, is quietly funnelling tens of billions of pounds from the Treasury to commercial banks and ‘shadow’ financial institutions. These payouts are not tied to productive investment or economic risk-taking. They are, in essence, payments for doing nothing—for holding central bank reserves created by the Bank itself. And now, for buying government bonds at a discount while the state swallows the losses.

The scale is staggering. In the 2023–24 fiscal year, the Bank received £44.5bn from the Treasury to cover losses from the APF. In Reeves’s 2024–25 budget, the figure rises to £54bn. This is not loose change. It far exceeds the so-called “fiscal headroom” Labour has inherited and is money that could be used to tackle poverty, fund housing, or invest in public services. Instead, it’s being quietly redirected to the financial sector.

Originally created in response to the 2007-9 crisis—and later expanded during the pandemic—the APF enabled the Bank of England to buy up hundreds of billions of pounds in government bonds. To finance these purchases, the Bank created central bank reserves, which now sit idly on the balance sheets of private banks, earning interest at the Bank’s policy rate. That rate currently stands at 4.25%. The bonds purchased, by contrast, yield closer to 1.5%.

The result is a sustained and predictable loss, borne by the Treasury, and a windfall for banks. As if that weren’t enough, once Quantitative Tightening began in full earnest in 2022, the Bank opted not to let these bonds mature naturally, but actively to sell them. Since prices have fallen due to interest rate hikes, the Bank is making losses. The winners are ‘shadow’ banks and commercial banks buying the securities at knock-down prices. Once again, the public picks up the tab.

The rationale for these moves according to the Bank of England is that they are part of responsible monetary policy to control inflation. But this is groundless. Other central banks have managed Quantitative Tightening differently. The European Central Bank, for instance, “tiers” the rate of interest paid on reserves. The US Federal Reserve is allowing its bond portfolio to shrink passively as assets mature. The Bank of England’s has opted for a far more aggressive strategy, which is enormously expensive for the taxpayer and subsidises the financial system.

There are two immediate reforms that could stem the tide.

First, the government should end full-rate interest payments on QE-created reserves. These reserves were supplied by the central bank as a monetary intervention—not as a permanent source of risk-free income for commercial lenders. There is no good reason why the public should continue to pay 4.25% on them.

Second, the Bank should stop the active sale of bonds at a loss. Allowing them to mature would avoid unnecessary losses for the Bank of England and reduce pressure on an already overstretched government budget.

Neither of these reforms would compromise the independence of the Bank of England, if the government still insisted on abiding by this shibboleth of the worst years of financial excess. They are about adjusting the terms of monetary policy to reflect the economic and political realities of 2024, not 2009.

And yet, Reeves, bound by her pledge of fiscal discipline, has turned her gaze inward—towards benefit claimants, public services, and tax increases. MPs and the public have every right to ask: why is it unaffordable to lift children out of poverty, but perfectly affordable to subsidise the banking sector?

What the Treasury and the Bank of England are doing is neither an oversight nor merely a technocratic detail. It is a political and social choice that reveals where power lies—and whom our economic system truly serves.

Labour must decide: will it be the Party of working people or the Party of financial appeasement? The billions bleeding out through the APF could transform lives instead of subsidising banks and ‘shadow banks’. It’s time to end the silence.

Costas Lapavitsas is a Professor of Economics at the School of Oriental and African Studies, University of London. He was elected as a member of the Greek Parliament for Syriza in January 2015, subsequently joining Popular Unity later that year.

Image: Bank of England. Source: https://www.flickr.com/photos/alexguibord/9378760126. Author: Alex Guibord from Toronto, Canada, licensed under the Creative Commons Attribution 2.0 Generic license.