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The new bank levy will have wide applications and may impact on the non-banking business of banks

A levy will apply from 1 January 2011 to the balance sheets of banks and banking groups with liabilities of at least £20bn.

This is in advance of any prospective agreement on the IMF proposal that G20 nations levy two separate taxes on banks, the Financial Stability Tax (FST) and the Financial Activities Tax (FAT).

The levy will be charged at 0.04% of the bank’s liabilities in 2011, later increasing to 0.07%. These rates will be halved for wholesale funding with more than one year to maturity. The levy will not be deductible for corporation tax.

The levy will not be imposed on liabilities in the form of Tier 1 capital, insured retail deposits, repos secured on sovereign debt and policyholders’ liabilities of retail insurance business within banking groups.

The basis for the levy aims to encourage prudent behaviour by banks and not to discourage lending by banks, including interbank lending. It remains to be seen whether banks may conversely become super-capitalised. The choice between Tier 1 capital and more flexible funding (with the levy) will ultimately be a commercial decision, since Tier 1 is the most expensive form of capital, and the difference will depend on the financial circumstances of the group. We think that there is scope for the list of exclusions to be expanded to cover, for instance, external financing arrangements entered into by bancassurers, which may find their way as liabilities onto the bank’s consolidated balance sheet. Retail insurance is perceived as safe compared to institutional insurance, but there is scope for including categories of wholesale insurance of a less risky variety, for instance unit-linked policies issued to pension scheme trustees, or reinsurance of retail business.

The levy will have very wide coverage. Apart from UK headquartered banking groups and building societies, it will apply to the aggregate balance sheets representing the UK presence of foreign banking groups and to banks owned by non-banking groups such as insurance groups with retail banking arms. Although the rates by themselves are low, it should be noted that with Sweden, Germany and France having announced similar measures, there is a risk of double counting for banking groups suffering different versions of the levy on the same liabilities both in the country where they are headquartered and those where the liabilities are used by established branches and subsidiaries.

The proposal must be factored into the costing of banking institutions’ current plans for financing. The government led consultations this summer and will publish details later this year. We will be working with our clients in the consultation process and hope it will be constructive, ironing out concerns and uncertainties in the time before the new tax takes effect.

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