Fears increased bank levy will hurt lending and competition

Tim Wallace
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LENDING prospects took another knock yesterday as the bank levy was hiked again – though the government claimed it was needed to keep revenues steady even as the sector shrinks.

Analysts warned the measure reduces incentives for banks to grow, takes money away from them which could be used to increase lending or capital levels, and is another factor discouraging foreign banks from operating in the UK.

The government plans to raise a steady £2.5bn from the levy, which applies to banks’ liabilities, rather than to flows of revenue or profit.

But as banks’ balance sheets shrink, the levy must be increased if it is to maintain the same revenues.

The levy was increased to 0.088 per cent for the start of 2012 and is already going up to 0.105 per cent next month, before being hiked again to 0.13 per cent the next year.

It raised £1.8bn last tax year and is expected to do the same this year. The increase will take that up to £2.8bn in 2013-14 and £2.9bn the following tax year. And the rules will be changed to extract more cash from foreign banks. Under new plans foreign banks will no longer be able to claim the cost as a deduction against corporation and income tax.

But Ernst & Young warned the tax is damaging for the economy.

“If a bank is growing its balance sheet to try to quickly increase the supply of credit it can offer UK businesses, a blanket increase to the bank levy will actually penalise them,” said head of financial services Chris Price, who also noted the conflict in policies between bank tax and the treatment of other firms.

“The UK has moved to a declining corporate tax rate on the UK profits of UK headquartered groups and yet the bank levy is going in the opposite direction, with an increasing rate continuing to be applied to global balance sheets held in the UK.”

And he added that extending the tax to foreign banks “will damage the outlook for London as the home of international banking.”