In the June 2010 budget the UK government announced the introduction of a bank levy from 1 January 2011. In a joint statement on the same day the UK, French and German governments announced that they would coordinate on the introduction of a bank levy in each of their countries, and they consider these measures to be in line with the G20 agenda for financial sector reform. However the bank levy introduced in each country will have different characteristics. The European Union continues to encourage a more harmonised approach to bank levies among member states.
More details of the UK bank levy remain to be discussed between the UK government and the financial services industry. According to the information issued by the government, the bank levy will apply to the consolidated balance sheet of UK banks; the subsidiary and branch balance sheets of foreign banks operating in the UK; and the balance sheets of UK banks in non-banking groups.
Banks will only be liable to pay the levy where their relevant aggregate liabilities amount to £20 billion or more. The bank levy will be based on total liabilities excluding Tier 1 capital, insured retail deposits, repos secured on sovereign debt and policyholder liabilities of retail insurance business within banking groups. In the calculation of branch liabilities and Tier 1 capital, the UK government will use the same principles as are currently used in the capital attribution methodology for corporation tax purposes. Anti-avoidance provisions are to be included in the legislation.
Subject to further technical details of the bank levy that are still being worked out in consultation with the banking industry, it is proposed that derivative liabilities will only be taken into account where there are net derivative positions.
The UK government proposes that the bank levy, which will not be deductible for corporation tax, will be introduced at a rate of 0.04% in 2011 but the rate will subsequently rise to 0.07%. There will be a reduced rate of levy for longer maturity wholesale funding (where there is more than one year left to maturity), which will be half the main rate. Therefore in 2011 the reduced rate will be 0.02%, rising in future years to 0.035%.
The UK government has stated that one reason for the introduction of the bank levy is to encourage the banks to move to less risky funding profiles. The levy is also being brought in to ensure that banks pay a fair levy in view of the risks they are seen to pose to the UK financial system and wider economy.
The bank levy is just one of a number of new regulatory requirements including Basel III that the UK banks will need to comply with. Conforming to regulatory requirements will involve increasing their capital requirements and liquidity.
The UK government suggests that the introduction of the bank levy in the UK is based on work previously done by the International Monetary Fund in the general area of banking and transaction taxes. The bank levy is expected to raise around £2 billion per year, possibly collecting several hundred million pounds from each of the largest banking groups in the UK.
The levy is viewed by the UK government as part of a wider financial regulatory reform agenda. These reforms are intended to ensure that no firm is “too big to fail”. The bank levy is not intended to be a payment for insurance against the failure of a financial institution and it is not intended as a contribution to a fund to rescue financial institutions in the future.
France, Germany and the USA are all moving in the same direction as the UK with regard to the introduction of a bank levy. Other large economies such as Brazil, India, China and Canada have a different attitude to bank levies and are concentrating their attention on tightening up the regulation of banks rather than imposing a bank levy. The UK must be careful to protect its prominent position in financial services, as this industry remains very important to the UK economy despite the perceived need to strengthen other sectors such as advanced manufacturing, bioscience and green technology. Co-ordinated action on a bank levy by a large number of countries would be desirable to maintain a level playing field.
One of the important topics for discussion between the UK government and the financial services industry will be the precise definition of the financial institutions that will be liable to pay the bank levy. The definition of a financial institution has given problems when previous legislation has been introduced and it is not as straightforward as might be supposed. For example, a number of non-banking groups have become involved in providing financial products to their customers and are engaged to some extent in providing banking services.
The consultation process may also need to consider a more detailed definition of the balance sheet liabilities to be taken into account for the purposes of the levy, and clarification of how frequently the computation of these liabilities would have to be performed.
Another issue that may require consideration before the introduction of the bank levy is the possibility of double taxation of UK banking groups given that other countries are contemplating similar levies. The UK bank levy will be imposed on the basis of the global liabilities of UK headquartered banking groups, and if France, Germany, the US and other countries impose levies based on similar rules it is likely that double taxation will arise. This would need to be dealt with by a measure allowing unilateral double tax relief for the bank levy in the UK, supplemented by protocols to double taxation agreements with other countries setting out how each country will compute double tax relief for the purpose of the bank levy.
HM Treasury website www.hm-treasury.gov.uk
Bank of England www.bankofengland.co.uk
Deloitte budget website www.ukbudget.co.uk