Yesterday, Chancellor of the Exchequer George Osborne, in his June Budget Report Statement to the House of Commons, announced the introduction of a levy on U.K. banks, including the U.K. operations of foreign banks, that is expected to generate over £2 billion per year once fully implemented. The levy will begin in January 2011 at a rate of 0.04% of consolidated liabilities, excluding Tier 1 capital, insured retail deposits, repos secured on sovereign debt and policyholder liabilities of retail insurance businesses within banking groups, increasing to 0.07% in 2012. Institutions with aggregate liabilities (less the excluded items) below £20 billion will be exempt, and longer-maturity wholesale funding (i.e., greater than one year remaining to maturity) will be assessed at half the rate of other liabilities (i.e., 0.02% in 2011 and 0.035% in 2012 and thereafter). Finally, only net derivatives positions will be included, but the government "will consider the technical details of this and other aspects of the levy design on consultation with industry over the summer."
The government stated that the "levy is intended to encourage banks to move to less risky funding profiles." Mr. Osborne reasoned that, "This was a crisis that started in the banking sector. The failures of the banks imposed a huge cost on the rest of society. So I believe it is fair and it is right that in future banks should make a more appropriate contribution, which reflects the many risks they generate." Yesterday’s statement follows other discussions of a bank levy by members of the U.K. government. Mr. Osborne also said that "We are exploring the costs and benefits of a Financial Activities Tax, on profits and remuneration, and we will work with international partners to secure agreement."
In a joint statement issued by the U.K., German and French finance ministers, France and Germany also announced their intention to impose similar levies. France’s proposal will be outlined in its upcoming budget process, and in Germany, draft legislation will be introduced later this summer. The joint statement says that, "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk. The specific design of each may differ to reflect our different domestic circumstances and tax systems, but the level of the levy will take into consideration the need to ensure a level playing field."
The European Council has also expressed its support for a tax on financial institutions in a letter to G-20 members: "We have an agreement at European level that Member States should introduce systems of levies or taxes on financial institutions, to ensure fair burden sharing and set incentives to contain systemic risk, as part of a credible crisis resolution framework. We consider that international work on levies and taxes on financial institutions should continue to maintain a world-wide level playing field. Also the introduction of a global financial transaction tax should be explored and developed further in that context."