In 2010 the plan was to tax banks based on the size of their balance sheet, aimed at making them shrink down and rely less on risky funding sources.
But as they got smaller, so did the levy’s revenue – leading the chancellor to hike the rate seven times.
Now the Treasury is looking at ways to fix the levy for a set period of time regardless of the size of banks’ liabilities, ensuring a more steady stream of revenue.
Instead of charging banks 0.156 per cent of their liabilities, the Treasury is considering introducing a banding system.
Under this, banks would pay the levy at different rates depending on which size bracket they fall into.
As a result banks could grow or shrink their liabilities to the tune of tens of billions of pounds without changing the payment to the Treasury.
But for banks at the edge, analysts fear the cliff-edge will create perverse incentives for them to do less business in Britain, to achieve a lower bill.
“A banding system naturally comes with the cliff-edge effect, which runs the risk of magnifying incentives for foreign banks near a boundary line to move business lines out the UK, or even disincentivising them looking to the UK in the first place,” said EY partner Jonathan Richards.
The Treasury is looking at smoothing this cliff-edge by keeping banks in their original bracket for up to two years after they change in size – but this could again result in higher bills for banks which are shrinking.