Banks celebrate being let off lightly

10:10 am - June 23rd 2010

by Sunder Katwala    

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George Osborne could see the symbolic political value in putting a tax on the banks, but has squared the circle of pleasing City opinion by producing a smaller levy than many had anticipated.

The Wall Street Journal reports that the UK banking sector “can count itself lucky”.

Robert Peston of the BBC says the Tories won the argument with the Liberal Democrats over the size of a bank levy, with their coalition partner proposing a £5 billion a year tax.

That £2.5bn is a fraction of what the Tories’ coalition partners, the Liberal Democrats, wanted to extract from the banks.

And the tax rate – 0.04 per cent next year, rising to 0.07 in 2012/13 – is well short of the 0.15 per cent rate proposed by President Obama (although his tax would die after a bit more than $100bn has been raised).

Which probably explains why banks’ share prices didn’t move much today (Lloyds up, RBS up less, Barclays down a bit).

The head of equities at City Index said that UK retail banks also rallied after the headline grabbing bank levy came in lighter than perhaps anticipated.”

Another analyst, off the record, said that, any levy set at less than £5 billion might be regarded by some as a “rounding error”.

City voices are taking care not to publicly sound too relieved.

The British Bankers Association offered a measured response, understanding the reasons for the tax while going through the motions of warning about competitiveness.

However, Peston suggests that Lloyds, Royal Bank of Scotland and Barclays may face a significant bill, while most other banks and building societies may well escape paying much, or anything, towards the levy at all.

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About the author
Sunder Katwala is a regular contributor to Liberal Conspiracy. He is the director of British Future, a think-tank addressing identity and integration, migration and opportunity. He was formerly secretary-general of the Fabian Society.
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Reader comments

Context: Relieved because they thought they were about to get spanked, or relieved because they have been given a boost?

Looking at those share prices, no movement, it looks like the budget was pretty balanced against banks if they neither gained nor dropped in value on the back of it. We don’t want banks to face any immediate crisis so surely this is the best situation…assuming that the banks would have lost value with a greater levy or higher taxation?

Umm, you seem to be missing the point of the bank levy.

Rather than type it all out again, a full discussion is here.

In short: we’re guaranteeing the banks’ wholesale liabilities. We might not want to be, but we are. That’s insurance which the banks should pay for and that’s what the bank levy is. It is charged as a percentage of liabilities (NOT assets, as R. Murphy seems to think) and only those liabilities which are either not covered by other insurance schemes (standard deposit insurance for example) or Tier 1 capital. Further, it is time dependent: you pay more in the levy for overnight borrowing, commercial paper and the like, the things most subject to possible runs, and less for long term borrowings like bond issues.

It’s also almost exactly the same as Obama’s proposals.

It’s a damn good idea: banks should be paying a premium for the insurance that they get from the taxpayer.

The banks will probably say the stock market had already factored in the prospect of a levy.

In any case, the banks will simply pass on the levy to their customers, which probably explains why they are so relaxed. What we really need to look at is how profitable are the retail banks in Britain, compared with banking systems in other west European countries, and the linked question of how competitive is the market in Britain for retail banking?

Remember that row in the recent past part exorbitant charges for over-running overdraft limits? How did the banks get away with it for so long?

See: FAQs complaints about bank charges

Remember that row in the recent past part exorbitant charges for over-running overdraft limits? How did the banks get away with it for so long?

They won the case in the House of Lords – on public policy grounds.

5. Luis Enrique

Yes, underlying this post, I can’t help feeling, is that idea that if we were to tax the banks heavily, it would be the bankers who would pay, which is what we want.

Why can’t people get their heads round the idea that when you tax a company, the money has to come from somewhere, and there’s no reason to think that money comes straight out of the bonuses of directors or the dividends of shareholders?

A more sensible reason for “taxing the banks” is to change their behavior, and change the “prices” they face for certain activities – the fact that taxes are (to some extent) “passed on” to customers and employees is then not the point. This is what Tim’s talking about.

Now I like the idea of “making bankers pay” but “taxing banks” does not achieve it. Taxing bonuses, taxing dividends, are more direct routes. But really we need to make changes in how the financial industry works, so the banks don’t pay their top staff so much in the first place, pre-tax. Mucking about with taxes won’t achieve that. (unless the taxes make that “change in how the industry works”, but I can’t think of what that might be)

@4: “They won the case in the House of Lords – on public policy grounds.”

What exactly did the Surpeme Court decide?

Quote: “In a move that stunned campaigners, the Supreme Court went against earlier findings by the High Court and Court of Appeal and decided the OFT did not have the right to assess the charges for fairness.”

Which means the question about how did the banks get away with exorbitant charges to customers for exceeding overdraft limits still applies.

The best initial advice for victims is to look up the website of the Financial Ombudsman Service:

6 – well ish.

This is one of the few things about which I can claim some degree of knowledge (I worked on the case at first instance) and the main point at issue was whether it was possible for the court to rule on the fairness or otherwise of the charges. This depended on two things.

The first was whether these charges were penalties (in which case there is a requirement that the penalty be proportionate to the loss – penalty clauses are unenforceable in English contracts) or fees for a service. It was determined (at first instance and never appealed) that they were the latter, fees.

The next question was, if these are fees, are they subject to a legal test of fairness? Obviously the court has no jurisdiction to determine the fair price of goods or services (freedom of contract being the cornerstone of English civil law). But, the Unfair Terms in Consumer Contracts Regulations (which brings in an EU Directive to the same effect) does govern the fairness of non-core elements of consumer contracts.

So the question that bounced up the courts was – are unauthorised overdraft provisions a core part of the banking service. Supreme Court decision:

Charges for unauthorised overdrafts are monetary consideration for the package of banking services supplied to personal current account customers. They are an important part of the banks’ charging structure, amounting to over 30 per cent of their revenue stream from all personal current account customers. The facts that the charges are contingent, and that the majority of customers do not incur them, are irrelevant. On the view that I take of the construction of Regulation 6(2), the fairness of the charges would be exempt from review in point of appropriateness under Regulation 6(2)(b) even if fewer customers paid them, and they formed a smaller part of the banks’ revenue stream. Even if the Court of Appeal’s interpretation had been correct, I do not see how it could have come to the conclusion that charges amounting to over 30 per cent of the revenue stream were (para 111) “not part of the core or essential bargain.”

So, in other words, the banks were able to get away with exorbitant charges because they were an integral and clearly explained element of the overall banking service provided to customers, and the courts have no power to interfere in freely-entered into contracts on that basis.

The SC judgement is here by the way. I’d recommend you avoid Smith J’s first instance judgement, it’s about a million pages long and almost inexpressibly tedious. Bad enough having to sit through the hearing…

I don’t know if anyone watched the cameron/clegg thing earlier, but Clegg was saying if there was a way of taxing all the money out of the city then they would use it. What a pack of lies, you look at the billions that these banks have and then the savage cuts coming onto the public sector. BP are being held accountable and being forced to put aside 20 billion to deal with the issue. The same should happen here to banks, imagine what we could do with 20 billion!

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