Caning the Banks

The coalition government's new levy on banks will be a levy on banks' customers

Under the cloak of charging banks for the costs they have imposed on the Treasury, the new coalition government has made a levy on banks one of its centrepieces. They echo the International Monetary Fund’s recent proposals for a levy on all financial institutions. Unfortunately, such a tax will simply give the government a licence to extract more money from citizens’ pockets. 

Further bank taxes will not serve their ostensible purpose. Instead, they provide an escape route for governments — including our own — whose structural borrowing levels are perhaps the major cause of global
financial stability. 

The IMF proposes a flat-rate levy on all financial institutions. At the time of writing, we have no details of the coalition’s plans but both the Conservatives and Liberal Democrats welcomed the IMF proposals. This tax, the IMF argues, may become risk-based over time — but don’t hold your breath. Everything about the plan smacks of a revenue-raising ruse. The IMF recognises efforts that have been made to reduce the cost of bank failure — such as providing for an orderly wind-up of a bust bank — but takes no proper account of those measures in recommending the size of the levy. Because the IMF believes that restricting the tax to banks would be difficult to manage, it suggests extending it to every financial institution: life insurance companies with their huge assets and safe business models would bear the cost of this levy too, as would hedge funds that are not implicated in the recent crash. The whole approach is reminiscent of teachers who used to cane a whole class because they could not work out who had been talking.

It does seem clear that the British government will not set up a fund for the proceeds of the levy to meet future costs of crisis resolution. But, if the levy were to go ahead, earmarking is vital. The rapacious appetite that governments have for taxpayers’ money knows no bounds. Indeed, the Conservative Party promised in its manifesto to use the proceeds for unrelated purposes. We seem to be in danger of treating banks as pariahs while assuming that governments are run by omniscient angels who will use this levy — and its proceeds — for purely beneficial or benign purposes. 

The proposed levy on banks will, of course, be a levy on the public — that is on banks’ customers. A great success story of the 1980s and 1990s was the lowering of borrowing costs: spreads for secured borrowing, such as mortgages, declined markedly to the significant benefit of the majority of households. An important reason for this was the deregulation of banking, something that is now in danger. 

Politicians should ensure that the legal framework for banks is such that bailouts do not happen and the sector does not impose costs on taxpayers. I do not support the particular Lib Dem proposals for trying to ensure this but they did, at least, argue in their manifesto that the levy would cease when banking reform had taken place. The Conservatives made no such promise and, ominously, there is no reference to a temporary levy in the coalition document.

Instead of extracting money from banks’ customers we need governments — especially the US government — to stop encouraging irresponsibility by underwriting mortgages, encouraging securitisations, through weak personal bankruptcy laws, through tax systems that encourage gearing and by repeatedly bailing out failed financial institutions for political reasons. That requires real political courage to take on the vested interests: far more courage than levying another tax on the popular whipping boy of the day.

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