BREAKINGVIEWS – UK bank tax could raise up to 3.6 billion sterling a year

By Reuters Staff
March 24, 2010

– The authors are Reuters Breakingviews columnists. The opinions expressed are their own –

By George Hay and Hugo Dixon

LONDON, March 24 (Reuters Breakingviews) – A UK bank tax of the sort being advocated by both main political parties could raise up to 3.6 billion pounds a year. The exact sum would depend on which parts of the balance sheet are taxed. But one thing is clear: as a proportion of earnings, RBS and Lloyds would be harder hit than Barclays, HSBC and Standard Chartered.

The most basic way of levying the tax would be to follow what President Barack Obama has proposed for the United States. He wants to levy a 0.15 percent annual charge on a bank’s total assets — minus its deposits and Tier 1 capital. Applying that to the five big UK banks would raise 3.6 billion pounds annually, according to Reuters Breakingviews analysis.

But the tax, likely to be formally endorsed in today’s Budget by Alistair Darling, the chancellor, could be modified. The opposition Conservative party says it would move ahead with a levy, even if other countries didn’t follow suit — but, in such an event, the tax wouldn’t be especially high through fear of driving Britain’s banks offshore. The Conservatives haven’t spelt out exactly what they’d do but they have spoken warmly of the “Swedish model”. Applying a levy at the same rate as the Swedes — 0.036 percent of total assets — would raise 2.1 billion pounds from the UK’s big five.

On the other hand, if a global approach can be agreed, some policymakers like the idea of concentrating the tax on short-term wholesale liabilities. The thinking is that it’s only such “hot money” that makes banks vulnerable — so long-term liabilities, say those over one year, should be excluded from the levy. Applying Obama’s 0.15 percent levy to a shrunken balance sheet, excluding long-term funding, would cut the UK’s tax take to around 2.7 billion pounds.

Whichever version of the tax is ultimately chosen, there will be relative winners and losers. Under the straightforward unmodified Obama tax, Lloyds would suffer a 21 percent decline in its forecast profit before tax for 2011, RBS a 20 percent drop, Barclays 11 percent drop and HSBC only 6 percent. The reason is simple: the earnings power of these bailed out banks is much lower than their healthier rivals.

CONTEXT NEWS

– The UK banking sector is likely to argue that any levy on balance sheets should be targeted to change bank behaviour rather than just raise money. Taxes on wholesale funding should aim to prevent firms becoming too reliant on short-term funding to fund longer-term, potentially illiquid assets, a senior banker told Reuters Breakingviews.

– Both the government and the opposition Conservatives have argued in favour of a tax — although the government believes it should only move forward as part of a global agreement while the opposition is prepared to move unilaterally.

– Alistair Darling, the chancellor, is expected to use today’s Budget to back plans for a global bank levy.

– U.S. President Barack Obama has proposed a 0.15 percent levy on banks’ balance sheets, less their insured deposits and Tier 1 capital. If the same approach was taken in the UK, Barclays would pay 950 million pounds per year, RBS and HSBC would each pay 830 million, Lloyds 820 million and Standard Chartered 170 million, according to a Reuters Breakingviews analysis.

– Meanwhile, a plan by Germany’s coalition to place a similar levy on banks could raise 1 billion euros a year and target only big private-sector lenders, sources told Reuters on March 22.

(Editing by Chris Hughes and David Evans)

((george.hay@thomsonreuters.com))

Keywords: BREAKINGVIEWS BANKTAX/

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