The U.K. should resist yet another bank levy hike. When the coalition's annual tax on lenders' balance sheets was announced in June of 2010, it looked a smart way to raise cash while encouraging banks to slash risky short-term funding. But bankers now expect a third hike in the levy's rate. This sensible tax risks becoming a joke.
The bank levy was originally designed as a seven-basis-point charge on banks' liabilities. Because it didn't include their deposits and allowed a lower rate for longer-term funding, it incentivized banks to make their liabilities safer. It also raised £2.5-billion ($4-billion) annually at a time when taxpayers were apoplectic about bank bailouts.
Two and a half years on, taxpayers are still hopping mad following misselling scandals and Libor-fixing revelations, and public finances remain stretched. But because two out of the five main U.K. banks are in full deleveraging mode, the stock of taxable liabilities has shrunk. Fixated on raising a fixed sum from the levy, the government has already increased it twice before, first to 0.088 per cent for 2012, then to 0.105 per cent for 2013. Another rise is on the cards, according to a person familiar with the situation.
But this creates problems. One is that healthier banks like HSBC and Standard Chartered will have to pay a bigger proportion of the tax as they are still increasing lending. Another is that raising the rate makes U.K. tax policy seem unnecessarily capricious.
Worse, a hike jars with other government policies at a time when the emphasis has to be on getting banks to lend to support the economy. Even though banks have much higher capital ratios and funding profiles, continuing regulatory change and the cost of correcting past misselling sins means Royal Bank of Scotland and Lloyds Banking Group are still making losses.
A smarter plan would be to freeze the rate and accept a lower tax take. At the very least, the government should ensure cheap liabilities created under its "Funding for Lending" stimulus scheme are not taxed: otherwise it disincentivizes the new lending which the initiative tries to enable. Pressing on blindly with another increase would complete the levy's transition from smart to dumb.