- Think tanks suggests new bank tax
- Tax to target QE-related windfalls
- Proceeds to offset some BoE losses
Shares in UK banks weighed on the market heading into the weekend after an independent think tank suggested the government fill its fiscal ‘black hole’ by raising a levy on commercial lenders.
Barclays (BARC) shares were 3.3% lower at 356p, while Lloyds (LLOY) dropped 3.7% to 79.35p and NatWest (NWG) fell almost 5% to 511p.
The news also sent shares in smaller lenders lower, including Close Brothers (CBG) and Metro Bank (MTRO).
BANK OF ENGLAND BAILOUT
The sell-off was prompted by a report published by the IPPR (Institute for Public Policy Research) highlighting the fact the Bank of England is making significant losses, which are currently being paid for by the Treasury, adding to the government’s budget deficit.
According to the report, the central bank’s problems – which stem from the unintended consequences of QE (quantitative easing), including selling government bonds below their purchase price and interest rate losses – are likely to cost the Treasury, and by extension UK taxpayers, around £22 billion per year during the current parliament.
The IPRR suggests a two-pronged approach to tackling the issue: introducing a ‘QE reserves income levy’ on all domestic and foreign commercial lenders in the UK with assets of more than £25 billion, to raise between £7 billion and £8 billion per year; and slowing the pace of undoing QE by ending the ‘fire sale’ of government bonds, saving more than £12 billion per year.
‘WINDFALL’ PROFITS
By taxing reserve returns in excess of 2%, which it regards as ‘windfall profits’ for the banks, the IPPR estimates the Treasury would save between £35 billion and £40 billion of taxpayer losses over the course of this parliament, boosting fiscal headroom against the current budget by £5 billion to £7 billion, with the proceeds used for ‘supporting households and growth’.
‘The UK taxpayer is spending £22 billion a year compensating the Bank of England for losses on its QE programme, public money which is partly being funneled to commercial bank shareholders,’ says the think tank.
‘This subsidy of commercial banks, at the expense of public services, is boosting bank profits while millions face the cost-of-living crisis. Since interest rates began rising in December 2021, the four largest UK banks have seen their annual profits more than double, up by £22 billion compared to pre-pandemic. Some of this is a direct transfer of funds from the taxpayer to shareholders.’
The think tank argues the proposed levy does not interfere with the Bank of England’s operations but would more or less match the interest-rate losses made and would be time-limited, so if interest rates fell below 2% or QE is finally unwound it would cease.
