The stupid, it hurts. Yes, Labour again

Dear God these people are stupid.

Labour also criticised the government\’s bank levy, a tax on banks\’ balance sheets, which it said had raised nearly 2 billion pounds less than intended since its introduction in 2011. The levy was expected to bring in 2.5 billion a year but has failed to do so because banks have been shedding assets to bolster their finances and meet tougher regulatory requirements.

The banking levy is an insurance premium to cover the too big to fail guarantee which government gives the banks.

That\’s why it is set up in the manner that it is. It\’s a percentage of assets (ie, the borrowing by the bank, the deposits that are made at the bank) in institutions with more than £50 billion in assets (??) and where the assets are not covered by other deposit insurance schemes.

Thus a bank which had £100 billion in assets, all of which were of less than £80k per customer, would pay nothing at all in the banking levy. For all such deposits would be covered by that other, basic, depositors\’ insurance scheme.

A bank that had no individual depositors at all, which purely and solely had £100 billion in assets from the overnight money markets, would be paying the levy on the entire £100 billion.

And the shorter term the borrowings then the higher the rate is. Money locked in by, say, a long term bond issue, pays less than the potentially more flighty overnight deposits.

A bank with less than £50 billion doesn\’t pay it: because Ministers would let it go bust rather than bailing it out.

Why was this done? Well, we all know that fractional reserve banking is potentially subject to runs. The solution to that is deposit insurance. And what actually happened back in 2007/8 is that a number of institutions suffered wholesale banking runs. Northern Rock being one example. The solution to this is what was done: government support, guaranteeing those depositors. That\’s if you don\’t want the entire system to fall over of course.

OK, given that Ministers did indeed support the banking system in this manner we can now see that there is at least an implicit guarantee to said banks. The systematically important ones, the too big to fail ones.

Excellent: we\’ve at least partially solved the problem. But just one more thing is needed. If these banks are getting deposit insurance then they should damn well pay for it. Thus the banking levy. Which is, I know this is amazing, at about the rate that the FDIC charges to insure American banks.

Which leads us to why it\’s so damn stupid to complain that the levy isn\’t raising all that much money. Because, see, innumerate ones, the banks are reducing the asserts they hold that require such insurance. So, obviously, the insurance premiums go down. Which is as it should be: government is taking less risk (Hurrah!) and government is getting less money for taking risks (Hurrah!).

You know, banks are respnding rationally to the correct and accurate pricing of the risks being taken? What we want to happen?

To the point that we\’d rather like the revenues from the banking levy to be zero. Because that would mean that the taxpayer is not taking the risk of propping up the banking system any more.

Honestly, the banking levy is the one obviously swensible and decent measure that has been taken since the crash. So of course there are idiots who just don\’t get it. Unfortunately, as with so many other parts of life, the idiots are in Parliament.

16 thoughts on “The stupid, it hurts. Yes, Labour again”

  1. Surreptitious Evil

    You are having a conversation about a completely different subject than they are.

    This is what they are talking about:

    1. Evil banksters avoiding yet another righteous tax that would be spent on smiling babies and diversity advisors.

    2. Therefore “public school Tory scum”.

    It has nothing to do with the levy not being a tax nor with the economics of incentives. Less money raised (seized if you prefer) is a de-facto bad thing, regardless of how you were raising the money or the initial object of the exercise.

  2. The same conversation arises when carbon taxes are discussed

    ….. but the money raised will decrease as companies become more efficient, therefore carbon taxes are not a good idea…..

    Completely ignoring the fact that the whole point is to reduce CO2, so a falling tax income is actually a good thing.

  3. It’s just like a Pigouvian tax, isn’t it? “You’re doing someting we don’t like, so we’ll tax you at such a level that you stop.” It ought to be revenue-neutral (where “revenue” includes perceived externalities).

  4. Many people (predominantly on the left it seems) are able to hold two contradictory ideas in their heads – namely that they want people to do X, so enact a tax to try and shove people in that direction, but also want the tax on X to continue to bring in rising amounts of revenue so they can spend it on the usual wall pissing exercises. The idea that there are revenue raising taxes, and behaviour modification taxes, and that they are not the same thing appears to have passed them by. Perhaps they are blinded by the effect of taxes on cigarettes and alcohol, which despite all the efforts of the usual quangos to reduce consumption, tax revenues remain buoyant.

  5. Jim>

    “they want people to do X, so enact a tax to try and shove people in that direction”

    Try turning it around. They think X-doing is wrong, so enact a tax to try and punish X-doers. Of course, if you don’t like someone – say, because they’re stinky Jhooz, or ‘bankers’, or whatever euphemism for the tribe is being used today – then you’d like to keep punishing them and taking their money.

    It’s not inconsistent at all. Just fucking evil.

  6. Surreptitious Evil

    The inconsistency is in setting up the equivalent of a ‘sin tax’ and then moaning when the receipts fall because people change their activities.

  7. Of course, I could be really annoying and ask these critics what they think of the case for and against fractional reserve banking. (gulp, runs for the door).

    If we believe in the supposed alchemiac powers of “maturity transformation” (it sounds like a programme for misbehaving teenagers), and the idea that deposits meant for immediate withdrawal can be lent out for months, or longer, and that we need the state as lender of last resort + deposit insurance to guard against this rickety structure falling apart, then levies and other charges make sense. The money to pay for the rescues of institutions that are vulnerable to the business cycle has to be raised somewhere.

    I don’t think FRB should be banned, since anyone who puts money into a fractional bank should be regarded as taking a risk with their eyes open. But the risks need to be acknowledged. The Cypriots have recently had an object lesson in what FRB, when there are no emergency processes, leads to.

  8. There is problem inherent to fractional reserve that the bank levy does not dispose of: the tendency of FR banks to act pro-cyclically, e.g. lend money into existence like there

  9. Second time a comment of mine has gone wrong on this site. Full comment was thus, if it appears properly…

    There is problem inherent to fractional reserve that the bank levy does not dispose of: the tendency of FR banks to act pro-cyclically, e.g. lend money into existence like there’s no tomorrow as they were doing prior to the crunch.

    Full reserve both ameliorates the pro-cyclicality, plus the TBTF problem disappears because banks cannot suddenly fail under full reserve: reason being that depositors who want their money loaned on carry the downside risk involved in those loans, not just the upside profit. I.e. depositors (as in Cyprus) carry the risk, not banks.

  10. Surreptitious Evil, it’s even more basic than that. It’s political point-scoring. The goal is to attack anything the government has done, on any grounds that might seem vaguely plausible to a low-information voter. Whether any of it is true is entirely irrelevant to the exercise.

  11. SE>

    No, it’s not inconsistent at all. The ‘sin’ isn’t supposed to be a behaviour that can be changed. It’s actually a tax on the sinners, masquerading as something intended to change behaviour.

  12. “banks cannot suddenly fail under full reserve”

    Of course they can. What if a large proportion of their assets gets wiped out? That’s exactly what happened in Cyprus – Greek gov’t bonds went caput.

  13. Surreptitious Evil

    Surely, he says, in an unusually hesitant manner, the definition of “full reserve banking” is that (for capital adequacy purposes) banks are not allowed to count the (risk weighted, net present or any other permutation of) the value of any loans they make as “assets”?

    Whether these loans are gilts, corporate bonds, secured or unsecured?

    Because the minute you allow them to count a fraction of the loan as an asset, you have (1-fraction)al reserve banking?

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