Banks slapped with asset levy
The Government will introduce a levy from 1 January 2011 on banks and financial institutions holding assets of £20bn or more.
As explained in a Treasury notice, following consultation over the summer, a 0.07% levy will be raised on long and short-term liabilities, excluding safer Tier 1 capital, insured retail deposits. To begin with, a lower rate of 0.04% will be applied in 2011.
There will also be a reduced rate for longer-maturity wholesale funding that will start at 0.02% and rise to 0.035% (half the main rate). The levy will not be deductible for Corporation Tax.
“The levy is intended to encourage banks to move to less risky funding profiles,” the Treasury explained. “The Government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy.”
The move was supported by a joint statement from France and Germany, which are planning a similar tax.
But the measure did not satisfy tax justice blogger Richard Murphy. “It’s crazy to introduce a bank levy. The problem with a bank levy is that it’s a tax on assets, which reduces the banks’ capacity to lend, just when we need them to. We want a tax on transactions – the kind that give rise to big bonuses – what could be called a Robin Hood tax,” he argued.
“We want to stop high-risk transactions, not the banks’ capacity to lend, which will limit growth when we most need it.”
Bank levy
It seems to be similar to the FDIC in the US. However, the levy is likely to be passed through and included in the rates charged to clients.
The bonuses should be sufficiently mitigated by the proper implementation of Basle 2 where more risk requires more capital and therefore a cost to the P&L in terms of cost of capital. This cost of capital for increased risk should not be tax deductible.
However, a certain politician's view that Basle 2 is flawed because it does not counter cyclical effects is in error. Basle 2 was never intended to be an economic control instrument. It does somewhat asymmetrically deal in the cycles as if more risks are taken on the upward cycle, more capital will have to be maintained. If there was a downswing, it is should encourage more prudence in taking risk and incurring higher capital holding - however, it is possible that there will be a greater search for incremental profits and the opposite would occur.