Bank levy is ripe for reform as lenders cannot be vilified forever

Chancellor George Osborne is planning another Budget soon, as the UK's new Conservative administration redoubles its efforts to get to grips with the country's stretched public finances. The numbers still do not add up - as evidenced by a £57bn budget deficit and £12bn of threatened welfare cuts. So it must be tempting to stick to the populist line of milking the banks even harder, via the cash cow of the bank levy.

But Mr Osborne should resist this temptation. In some ways, the levy has served valuable ends: generating billions of pounds of tax and sending a bank-bashing message that will always win many more votes than it will lose. However, the policy is so flawed that it may threaten the long-term interests of the banks, the broader business community that they should be serving, and the taxman. Reform is overdue.

Britain's bank levy has been much in the news of late. It made headlines back in March when Mr Osborne raised the rate (to 0.21 per cent of a bank's balance sheet), and the target amount he wants it to raise (to £3.8bn).

That, along with a few other unpopular policies, prompted HSBC and Standard Chartered to weigh publicly whether they should relocate to Asia, where much of their business is based. At the same time, foreign banks have begun shifting some business away from the UK, as the Financial Times reported over the weekend (the levy is imposed on the global operations of UK banks, but only on the UK operations of international banks).

The UK was not alone in deciding to impose the levy, in the wake of the financial crisis. More than a dozen European countries now have one - indeed a levy is required under the terms of the EU's recovery and resolution directive, the new rule book that will govern how big financial groups can be wound up smoothly in a crisis.

But Mr Osborne's levy is unusually expensive. His pre-election rate rise was the ninth increase since the levy's introduction in 2011. Its closest comparator, the German levy, raises barely a 10th as much money.

Of course, being harsh is part of the point. Politically, the levy was conceived as a punishment for banks and the role they played in the crisis - as well as a way to recoup the taxpayer bailouts that followed. It was also supposed to incentivise banks to shrink their balance sheets and shed their riskier activities. Later, it became part of a broader policy response, particularly in the EU, amid calls for a pre-funded rescue mechanism that would obviate the need for future taxpayer bailouts.

Subsequent increases to the UK bank levy rate were rationalised by Mr Osborne as a way of ensuring that banks - the untouchables of the business world - did not benefit from cuts to broader corporate tax rates.

In practical terms, the levy has ensured that the Treasury gets a decent tax take from the banks at a time when their corporation tax contributions are low. Although most banks have now returned to profit, some are still able to offset deferred tax credits from crisis-era losses against their tax bills.

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

There are two plausible options to improve the levy's design while also maintaining a decent tax take.

First, reimagine it in conjunction with the incoming rules about ringfencing UK high-street operations. From 2019, those are the parts of the banking system that will carry implicit government support. Aligning the levy with ringfenced entities would remove foreign banks and UK banks' foreign operations from the scope of the tax. While the rate would have to rise to generate anything like the current revenue, the rationale would be powerful.

Second, limit the scope of the levy to UK balance sheets (including those of foreign banks), but reduce the rate by casting the net more widely. In line with the thinking of the EU resolution directive - which applies to investment businesses as well as banks - it would be logical if a levy connected with the safety and soundness of finance was not limited to banks.

For those still keen to punish the banks, any kind of levy reform will seem like a coward's response to the scaremongering of scandal-ridden institutions. But, even seen from this viewpoint, pragmatic justice must be better than seeing the wrongdoers abscond.

[email protected]

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation