The UK bank levy risks tarring banks as toxic

 
Marc Sidwell
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THE Treasury’s consultation on the introduction of a UK bank levy closes today. Draft legislation will be published in the autumn for further comment and the final draft will be published towards the end of the year. The levy will be introduced from 1 January 2011. As that hurried timetable suggests, the consultation is concerned only with working out the finest of details, rather than providing an opportunity to challenge the advisability of the levy itself.

The Treasury consultation document is clear on what the bank levy is not intended to be: it is not a fund for future bailouts. Instead, the UK’s bank levy has two stated purposes: firstly, “to encourage banks to move away from riskier funding”; and secondly, to tax large banks for being a lasting danger to the economy. The first is presented with little argument, while the second is alarming.

The consultation response by the Institute of Directors (IoD) addresses the first rationale in detail. As the IoD points out, in principle pricing risky behaviour to account for its costs is preferable to a ban. But we cannot assume the levy will achieve this. An effective levy in this sense might require an internationally uncompetitive and therefore impractical rate. The IoD concludes: “full computations of appropriate levels, linked to the costs that need to be priced in, should be published for public scrutiny”. Without data, this claim lacks substance.

We are left with only one real justification for the levy. In the consultation document’s own words: “It is fair and it is right that banks should make an appropriate contribution, which reflects the many risks they generate.” The banking industry understands that it has to reform itself and win back the public’s trust: many City representatives met yesterday at Mansion House to discuss this very problem. Can it really be helpful as part of that process to have the government expressly target banks as a hazardous, costly presence in the UK?

Note too the slippery nature of that word “appropriate”. Many were pleased that George Osborne did not set the UK levy far higher. But there is no guarantee that it will stay where it is. Ed Miliband has implied he would like to see it higher still. The Liberal Democrats wanted it higher as well. Osborne will not always be chancellor.

This levy is an uncompetitive policy that has more to do with feeding public resentment than with preventing another crisis. In leaving the banks at the mercy of future political calculations, it has the potential to help create one instead.