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Britain is at risk, BBA urges government to cut levy

Britain is at risk
Britain banks and the Institute of Directors have both called upon the government to take some counter-measures on the bank levy, as bank faces tighter regulatory scrutiny and higher taxes in the country. The country is already on the brink of losing its major ‘financial center’ status, and with HSBC planning to move its headquarters outside the UK, British banks are now facing the bigger burden than foreign banks that run their operations in the UK. A high stakes move coming from Britain’s biggest bank have other London-based lenders thinking amidst ongoing financial crisis as banks await regulatory rules to be finalized. HSBC chief had earlier challenged George Osborne over bank levy, warning it would end his efforts to increase dividend payments to shareholders, as he said a review of whether to shift its operations abroad would be completed by the end of the year.

Speaking ahead of the emergency Budget to be held this week, Anthony Browne, BBA’s chief executive said “The global banks constantly review where they base their business around the world, how much they put in London, New York, Singapore, Tokyo. They do quite detailed cost-benefit analysis in pounds and pence, or dollars and cents, about where you can most economically viably do different parts of the business. The trouble is that in London the negative side has got so much longer and positive side shorter. For a lot of them, they’ve reached a tipping point, and move the operations elsewhere.”

The banks are losing their leverage as the levy costs the industry billions each year, causing them to lose business to their overseas counterparts. The bank levy was initially introduced not only to raise money but also to discourage banks from holding too much debt from the risky borrowing, which was one of the main reasons why the 2008 crisis escalated. It’s a charge on the UK banks’ global balance sheets and on the nation’s activities of foreign banks. The bank levy was actually proposed by the International Monetary Fund (IMF) as an insurance scheme for all countries to tackle any future banking crisis. However, the UK government feared that these borrowings could be risky as banks would continue taking on more and more debt, eventually making them more vulnerable.

Osborne introduced the tax in 2010 at 0.05% of a bank’s liabilities, and increased it nine times since then. The biggest hike came in the March 2015 Budget, when the levy was raised to 0.21% of a bank’s assets from 0.16%. That lifted the amount the government aims to raise from the bank levy to £3.5 billion a year from the original £2.5 billion target.

Mr. Browne wrote in a letter to the chancellor urging him to get rid of the bank levy: “The time is overdue for a strategic review of the government’s policy for taxing banks to ensure that the tax regime for banking remains competitive. We would like the government to consider reform of the bank levy.” The letter came just in time as banks lose their patience, and people are already moving thousands of jobs overseas. Not to mention, big conglomerates, especially banks and insurance companies might consider moving offshore, if they haven’t made up their minds already, amid fears that the annual tax could prompt HSBC to quit Britain.

The question is what will that do for jobs in London? And what if other companies decide to join the band? Even if the chancellor hints at a slightest possibility of reforming the levy, the move would bring along deep reductions in public spending including significant welfare cuts. Most likely, banks moving out of UK might be just a threat, but if the government doesn’t act, they may very well move out of their home base. What started with an idea to make easy money of the UK’s financial sector seems to have backfired. However, banks with operations overseas, like HSBC, would not be so much affected. Banks are optimistic of a reform of the levy, as the chancellor prepares to present the first Conservative Budget on Wednesday.