Bank levy introduced

It’s January, so the government’s bank levy has come into force. The basic details are that it is a o.05 per cent levy on bank balance sheets, but rises to 0.075 per cent in 2012 and the details of how it works are designed to encourage banks to rely more heavily on more stable sources of funding in the future.

Expected to bring in £2.5 billion a year, the revenue is pretty small compared to the estimated costs of the financial crisis overall (even if future sales of the government’s bank shareholdings are factored in). However, at a time when banks are being pressed to lend more to businesses, a heavier tax could easily have been counter-productive.

The real test in terms of future financial stability, and having banks not just get a free-ride at everyone’s expense thanks to the knowledge that the government will usually bail them out, will be the banking restructuring proposals that the government will decide on later in the year.

Canary WharfThat of course is likely to involve heavy debate within the Coalition, with Vince Cable’s comments on bankers being very different from those of many Conservatives.

However, the appointment of a Banking Commission to come up with recommendations means that the detailed agenda for reform is being set outside of government. As Robert Peston said of the Commission:

The members’ identification of the problems tells you that what they’ll eventually say cannot be anodyne.

Their starting point is that if they were designing a banking system from scratch, it would look almost nothing like the banking system we have.

First and foremost, they believe that it is profoundly unhealthy for the UK to have banks which insist on the freedom to operate how they like (including paying whatever bonuses they like) and yet could not carry on in business without implicit or explicit financial support from taxpayers on a colossal scale.

So one challenge for the commission is to come up with a structural reform that would make banks, bankers, their shareholders and creditors completely liable for the business mistakes of banks’ managements, without putting at risk either the savings of retail depositors or the integrity of the payments and credit-creation systems.

That will mean forcing banks to hold substantially more capital – tens of billions of pounds more – to absorb potential losses … And it will also mean – subject to agreement in the EU (which won’t be simple to obtain) – some kind of credible separation of retail banking and the money-transmission mechanism from banks’ more speculative activities.

Watch this space as they say.

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9 Comments

  • “£2.5 billion a year, the revenue is pretty small compared to the estimated costs of the financial crisis overall”

    More like minute and insignificant.
    Bonuses were at record levels last year and they will be huge again this year.
    The public anger at the Banks has not diminshed and they will rightly conclude they have been let off yet again.

    After all, why would someone like Osborne or Cameron make those who caused the meltdown and crisis pay for it when they can cut the benefits of the poor and disabled to the cheers of their backbenches and the Thatcherite orange bookers.

  • I don’t hold out much hope for fundamental reform of the banks, any reform that hurts banks profits will be lobbied against on an unimaginable scale.

    Banks need to be seperated into transactional and investment banks with clear terms and conditions about the risks that you are allowing banks to take with your money.

    Only transactional accounts should have any kind of government guarantees and only up to a much lower level than currently given.

    Banks would then be in a free market to offer to manage savings, with it being up to the consumer to decide who trust with them.

    Investment banks would only be able to invest the money given to them – leverage would be impossible.

  • Andrew Duffield 5th Jan '11 - 10:32am

    “Expected to bring in £2.5 billion a year, the revenue is pretty small compared to the estimated costs of the financial crisis overall (even if future sales of the government’s bank shareholdings are factored in). However, at a time when banks are being pressed to lend more to businesses, a heavier tax could easily have been counter-productive.”

    You must be joking Mark! £2.5 bn is barely a third of this year’s bonus pot. The banks generate huge unearned income through ‘lending’ – i.e. creating sterling from nothing, charging in excess of £100bn a year in interest on money that didn’t even exist until UK borrowers begged for it. It’s about time the UK reclaimed its own currency. Tax this unearned lucre in a meaningful way and we could reduce levies on genuinely productive businesses accordingly. They then wouldn’t need to ‘borrow’ as much and the banks could start to engage in real equity investment instead of gorging on the free lunch that government continues to provide through our dysfunctional and unsustainable monetary system. This pathetic new levy, superficial tweaks to capital ratios and ongoing rhetoric over bonuses will do absolutely nothing to address the systemic problem. Where are the leaders with the balls to take on the banks and do the job properly?

  • This bank levy really is pathetic – far too little, far too late. Yet another miserable climb-down by Vince Cable – if this is the best he can do then he might as well just give up. At the moment the banks are getting away with blue murder – they actually produce or create nothing, and the vast majority of what they do is of no value to society or wider humanity. They are just greedy parasites who leech off other industries and people who do actually produce goods or provide genuinely worthwhile and needed services. The entire system needs to be reformed so that banks, as currently constituted, can be removed from the equation and rendered redundant.

  • So, the banks *might* pay £2.5 billion compensation for devastating the UK economy, but they won’t be able to afford any more.

    So what about the £7+ billion they’re paying out in bonuses? That would make nearly £10 billion.

    And what about the dividends they’ll be paying out to shareholders?

    And if we’re all under austerity measures, how about the amount they spend re-fitting the retail banks with shiny new surfaces and furniture , which they seem to do every 2-3 years?

    Plus they all seem to have fairly hefty advertising spends all the time.

    There’s much more money the banks could pay – IF the political will was there!

  • toryboysnevergrowup 5th Jan '11 - 12:56pm

    And what is the value of the as yet unrecognised tax losses that those banks that we bailed out will be allowed to set off against future profits? I seem to remember the figure was in excess of £3bn for RBS alone.

    Raising £2.5bn through a bank levy while allowing the banks to carry forward tax losses of a greater value, while using regressive taxes such as VAT to cover the shortfall is now presumably “progressive” in LibDem speak.

    “If you look at the effect of sales tax, it’s very regressive, it hits the poorest the hardest. It does. I absolutely promise you..it goes very very widely. VAT is a more regressive tax than income tax or council tax.” David Cameron

  • toryboysnevergrowup 5th Jan '11 - 12:59pm

    What odds on the profits from the sell off from the state owned banks being used for income taxes for the well off as a pre-election bribe? This is what Tories do I’m afraid – and I’m sure Nick Clegg/Vince Cable will stand up to them in the same manner as they have done to date.

  • It doesn't add up... 5th Jan '11 - 8:20pm

    This is a levy on bank customers who will pay it via higher charges etc. – not a levy on banks. It seems to me that those banks that get in trouble and need bailout funds should get those funds on condition that their bonus pot is slashed to the smallest level of say the past ten years until they no longer need that assistance. That would mean that more profit would be available to repair the balance sheet. It would also act as a punishment for failure. If, within a bank that goes into these measures are teams who think they can do better elsewhere – let them be sold off to bolster the banks’ balance sheet and try their luck. In my experience institutions that get into serious difficulties usually have few people who would actually succeed given a second chance because the ethos of the entire organisation has not taught them how to run a sound business.

  • Howard Johnston 14th Jan '11 - 5:23pm

    It is my contention that the banks in Britain are nothing short of economic traitors. There was a time when the banks in this country created the lubrication for business and industry – they were a vital and willing component of the whole economy. They performed an important function and did it well.

    Those days have long departed. In recent years (beginning in the 1980s) we have seen the banks becoming a law unto themselves. They have detached themselves from the rest of the economy and the aspirations of the country – they have become entirely self-serving entities. In short they occupy another economic zone to the rest of us, no longer part of the larger community, they are utterly self-interested and self-motivated.

    As if this wasn’t bad enough, the high fliers of these corporations acting as nothing less than gamblers took such huge and irresponsible risks that they became capable of not just destroying the banks themselves, but also the larger economies of various countries including our own. And their punishment for this financial wickedness? Usually just a golden parachute or relocation to somewhere else where they could continue their selfish pursuits.

    The end result is our government has to bail out their industry (in a way it has rarely assisted any other) with our tax-payers’ money. We saved these ‘experts’ from their own stupidity and how do they reward us? As soon as they start to make money again they all have their snouts right back in the trough taking huge, unjustified and downright insulting bonuses, whilst the rest of us just have to watch in utter disgust. The other end result of their behaviour is that businesses are going bust the length and breadth of the land – people losing their jobs – then their houses – family breakups – divorce – depression and so on. I really hope these bankers are pleased with themselves as they reach out to grab what they can once again. They care little for the rest of us. They are laughing at us.

    We are told that these bonuses must be paid otherwise the talent in the industry will depart these shores and go elsewhere. Let them go! Who needs talent that destroys the economy of a country? I ask you. Who needs these guys? Very few of them will go anyway, and if they did there are plenty ready to jump into their shoes and create the whole damn mess all over again.

    I accuse them of Economic Treason and demand the government stop talking about this in faintly embarrassed tones and do something about it. Some of these people should be sacked, others fined, others imprisoned.

    Make you own displeasure with the banks known and your own desire that something substantial is actually done about it!

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