Osborne unveils bank levy

22 June 2010

The coalition government will introduce a new levy on UK banks and building societies from 1 January 2011.

This will also apply to all foreign banks and building societies with UK operations.

The levy, which does not affect smaller banks and building societies, will be placed upon the balance sheets of banks, and will raise £2 billion a year. It will take 0.07% from all UK bank balance sheets, although it will initially be levied at 0.04% in 2011.

Crucially, this is part of a joint move between the UK, France and Germany. The levy has been the subject of much debate in recent months as it was feared that any move to apply it only to UK businesses would put firms at a commercial disadvantage and deter both banks and bankers from working in Britain. International cooperation is essential to ensure a level playing field.

Chancellor George Osborne noted: "There are those who have argued that we should wait until every country in the G20 introduces a bank levy. I believe that is not reasonable or fair."

He added: "This was a crisis that started in the banking sector and the failures of the banks imposed a huge cost on the rest of society. So it is fair and right that in future banks should make a more appropriate contribution which reflects the many risks that they generate."

A joint statement on the issue was due to be issued shortly simultaneously in London, Paris and Berlin. Although full details of the shape and structure of the levy have yet to emerge, analysts said it was likely to be similar to the one proposed by US President Barack Obama.

In the weeks before the election there was speculation that the chancellor was looking to raise about £3 billion from a bank levy, and possibly even as much as £5 billion, leaving some commentators to reflect that the banks have been let off lightly.

There were mixed reactions to the announcement on the stockmarket: the part-nationalised banks - Lloyds Banking Group and Royal Bank of Scotland - made gains after the chancellor failed to put forward plans to sell public holdings in their stock. Meanwhile, HSBC and Barclays suffered slight drops in their share prices.

The British Bankers' Association (BBA) said it accepted the reasons for a levy, but warned that it must not be allowed to hurt the competitiveness of the UK as a financial centre.

"The UK is a trading nation and we must ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here," the BBA said. "We are a large financial centre and a great many jobs are created here as a result... So bank levies need to be co-ordinated internationally: they must not prevent the industry in the UK from being able to compete."

Market commentator David Buik, of BGC Partners, described the levy as: "Basically sensible, though we await to find out how much, despite the chancellor telling us it would raise £2 billion. What the City did not like was the fact that perhaps a bank profits tax and a tax on bonuses waits in the wings. Enough is enough."

Meanwhile, the government is also taking action on unacceptable bank bonuses and will look at structural and non-structural measures to reform the banking system and promote competition. It will also consult on a remuneration disclosure scheme and explore the costs and benefits of a remuneration tax.

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