Tony's Ten: Tax on banks

14 December, 2012

Well, the British Chancellor of the Exchequer’s autumn statement has been and gone and it was all fairly depressing. 

One change which impacts the banks is the fifth increase in the Banking Levy, not bad for a tax which has only been around for a couple of years. The Bank levy rate increases on 1st January 2013 to 0.105 per cent for the full rate and to 0.0525 per cent for the half rate. 

It should be noted that the levy is the charge on bank liabilities which are not in the form of insured deposits or covered by government debt i.e. repos using gilts as collateral - government always looks after itself. It is a charge levied on the banks on their use of inter-bank funding. The first $20bn of such funding is exempt so a number of smaller banks are fine. Thus long-term debt (i.e. long-term bank bonds) is charged at the half rate. 

The reasons for the rise seem pretty obvious; the government expects to raise £2.5bn from the levy. However, in response to various regulations which call on them to improve their liquidity and leverage positions, the banks are rapidly improving these positions. Consequently, they are relying more on deposits, government cash and gilts created in the various Quantitative Easing programmes. Most importantly, banks are slashing back on lending as a direct result of having to reach their new capital, liquidity and leverage requirements, whilst also reducing the impact of the levy. This in turn, has reduced income generated by the levy. 

If you have a week or two spare (and let’s face it, what else are you going to do over the Christmas break), you could always read through the Bank Levy manual. This 210 page document covers one relatively minor bank regulatory/tax requirement and highlights how complex bank regulation has become:

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