UK Banks Hit With New Tax, But Escape Harsher Measures

22nd Jun 2010 17:29

By Patricia Kowsmann Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. banks escaped new taxes on profits and remuneration, but a widely expected levy on their balance sheets that could provide an extra GBP2 billion a year to the government raised warnings from the sector, which said the U.K. could risk losing its competitiveness. Earlier Tuesday, the U.K. Chancellor of the Exchequer George Osborne said the government will impose a levy on bank balance sheets from January next year. Germany and France have said they will also introduce such levies to offset the cost of potential future financial crises. Those affected in the U.K. include local banks and building societies, and the U.K. operations of foreign banks. Smaller banks with liabilities below a certain level won't be liable for the levy. The government said it is proposing a 0.07% tax on bank balance sheets, which comprises assets and liabilities. For next year, the rate would start lower, at 0.04%. According to Exane BNP Paribas analyst Ian Gordon, each of the five-largest U.K. banks will pay "in the low hundreds of millions" of pounds in such tax for 2011. Combined, the five are expected to post about GBP22 billion in profits this year. Analysts said the levy was lower than feared and isn't likely to dent any bank's capital position. In a note, Fitch Ratings said it doesn't anticipate any impact on U.K. or global bank ratings from the levy. UNISON, U.K.'s largest public sector union with more than 1.3 million members, called the tax a "poor substitute for a serious 'Robin Hood' tax on financial transactions." The British Bankers' Association, meanwhile, warned that the tax could make the U.K. banking sector less competitive. "Bank levies need to be coordinated internationally: They must not prevent the industry in the U.K. from being able to compete," the association said in a statement. "It is essential that the international banks do not find themselves taxed multiple times for the same thing," it added. Somewhat offsetting the bank levy is a cut in corporate tax that banks, along with all other companies operating in the U.K., will have to pay--to 24% from 28% over the next four years. Osborne, however, said the bank tax "far outweighs any benefit [banks] receive from the lower tax rates." Further details on the tax will be disclosed later this year, the government said in its emergency budget announcement. It also said it will continue to consider a tax on banks' profit and remuneration. Like other countries, the U.K. faces a massive debt burden following measures it took to boost the economy during the financial crisis. It is now trying to find new sources of revenue. The new bank tax targets riskier portions of bank balance sheets, and therefore excludes Tier 1 capital and insured retail deposits from the calculation. Shares of Lloyds Banking Group PLC (LYG) ended the day up 4.1% at 59 pence, while Royal Bank of Scotland Group PLC's (RBS) stock closed up 0.7% at 47 pence. Both banks, which are partly owned by the government, are undergoing a massive deleveraging, which will reduce their dependence on wholesale funding over time. Barclays PLC (BCS) recovered some earlier losses and closed down 2% at GBP3.11. The Association for Financial Markets in Europe, which has 197 members comprising leading European banks, as well as key regional banks, brokers and law firms, echoed concerns raised by the British Bankers' Association. "A unilateral U.K. bank levy could adversely affect an important sector of the U.K. economy and threaten the U.K.'s future as the world's leading financial centre," the association's acting chief executive, Mark Austen, said. "We will be watching carefully to see whether the actions of France and Germany are consistent with those of the U.K.," he added. People familiar with some of the U.K. banks' thinking said that while banks in general have accepted some form of payback to governments, there is a concern over more taxes that could be imposed in the future--including on remuneration and profit--which would create an even more unlevel playing field among banks based in different countries. -By Patricia Kowsmann, Dow Jones Newswires; +44(0) 207-842-9295, [email protected] (END) Dow Jones Newswires June 22, 2010 12:29 ET (16:29 GMT)