No Mr. Wintour, Just No

Put that economics down and come out with your hands up before you cause any more damage!

Ministerial sources suggested there might instead be a further hike in the bank levy.

Osborne first announced the levy on bank profits in the June 2010 budget, saying it was due to raise £8.3bn over four years. It is currently set at an annual tax of 0.075% on the value of all of the debts of UK banks.

No, it\’s not a tax on the profits of the banks. It\’s not even an annual tax on the value of all debts of UK banks.

It\’s charged only on the largest banks, those that have the implicit (well, pretty explicit now) \”too big to fail\” guarantee, that the government won\’t let them go bust. It\’s also not on all their debts (or liabilities as they are called in bankspeak) it\’s on only those that are not already covered by some other deposit guarantee scheme. So, for example, the £10 I have in a savings account is covered by the normal deposit guarantee scheme and the bank does not therefore pay this 0.075% levy on that £10 they owe me.

And please do note what this means: it\’s a tax upon some of their liabilities, not their profits. They pay this whether they make profits or not. And if they make vast profits purely from the use of regular depositors money they don\’t pay it while if they make losses by borrowing from the wholesale markets they do pay it.

It just ain\’t a tax on bank profits. While not entirely correct the best way to view it is as a tax on their leverage through the wholesale markets. And given that leverage through the wholesale markets is what brought Northern Rock down (although, amusingly, they weren\’t large enough to have had to pay it) it\’s not a bad thing to have either.

The correct way to view it is actually as an insurance premium on the insurance cover they\’re getting.

Which is a very good thing indeed for us taxpayers to be collecting: for we\’re providing the insurance so we should indeed be getting the premiums.

And please do note than when the likes of Andrew Haldane say the big banks are getting large subsidies, it\’s exactly this subsidy, the non-payment of premiums for the insurance that the banks get, that he\’s talking about. Which they should be paying for and indeed they are starting to pay for.

I realise that there\’s not a great deal to cheer about these days on either the finance or economics front but this particular one is. Problem sensible solution, all brought in by a Tory Chancellor*.

Who would have thought it, eh?

*Worth also noting that Obama has brought in the same thing over there. Which makes it truly astonishing, bi-partisan sensibleness shocker!

3 thoughts on “No Mr. Wintour, Just No”

  1. Super Sam – a bank’s balance sheet is the other way round to most companies. What a company calls a debt is an advance or loan. I believe that Tim is talking about their creditors – ie what they owe to customers in the form of deposit accounts etc. And they probably have been writing down some of those advances….

  2. diogenes and Super Sam

    Actually Tim made it clear that deposit accounts were excluded from the levy because they are already covered by FSCS insurance on which there is a separate levy. So this particular levy applies to other forms of bank liability, notably bonds they have issued and funds they have borrowed on the wholesale markets. If the bank doesn’t want to pay quite so much it needs to borrow less….which means shrinking its balance sheet by lending less or selling assets (loans).

    What is really interesting is that this levy doesn’t apply to most UK banks, even though the majority fund themselves through wholesale markets and/or bond issuance. I assume the idea is that banks too small to have to pay this levy would simply be allowed to fail….but whether that would happen in practice remains to be seen.

    The Government does have a habit of missing the target with bank regulation – as with the half-baked Vickers ring-fencing proposal, which would only apply to three UK banks, one of which is already in public ownership, and which wouldn’t have prevented the failure of any of the bailed-out banks anyway.

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