7 ways the Bank Levy could be improved

7 ways the Bank Levy could be improved

Implemented two and half years ago the bank levy is currently undergoing a much needed efficiency review. Gerald Montagu, a consultant in the tax department at Davenport Lyons, examines what the impact of the levy has been to date and how it could shape the future economy. Has it achieved what we wanted it to and how could it be improved? And the question on everybody’s mind, is it here to stay?

 

The alignment of the bank levy with the current regulatory framework and the operation of specific design features are among the elements being consulted on in the government's review of the levy's efficiency. The levy took effect on 1 January 2011, with the assurance of a review in 2013. The government is now consulting on the parameters of the review. Those wishing to comment should do so by 26 September 2013.

What is the bank levy and why was it introduced?

The Chancellor of the Exchequer explained in June 2010 that the bank levy would have two aims:

  • ‘encourage banks to move to less risky funding profiles’, and
  • ensure banks provide ‘a fair contribution in respect of the potential risks they pose to the UK system and the wider economy’

The levy was inspired, in part, by an IMF report, A fair and substantial contribution from the financial sector (June 2010).

To the extent that a bank’s (or banking group’s) chargeable equity and liabilities exceed £20bn, the bank levy is chargeable from 1 January 2014 at the full rate 0.142% in respect of ‘short term’ liabilities and a reduced rate 0.071% in respect of ‘long term’ liabilities and equity. The differential in rates is intended to encourage funding using sources like Tier 1 capital and protected deposits (which are both exempt from the bank levy) and long-term liabilities and equity which are subject to the levy at the lower rate.

Are the ‘overarching objectives’ of the bank levy being achieved?

The government believes a ‘fair contribution’ amounts to at least £2.5bn. The bank

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