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.