Bank levy introduced

It’s January, so the government’s bank levy has come into force. The basic details are that it is a 0.05 per cent levy on bank balance sheets, but rises to 0.075 per cent in 2012. The details of how it works are designed to encourage banks to rely more heavily on more stable sources of funding in the future.

Expected to bring in £2.5 billion a year, the revenue is pretty small compared to the estimated costs of the financial crisis overall (even if future sales of the government’s bank shareholdings are factored in). However, at a time when banks are being pressed to lend more to businesses, a heavier tax could easily have been counter-productive.

The real test in terms of future financial stability, and having banks not just get a free-ride at everyone’s expense thanks to the knowledge that the government will usually bail them out, will be the banking restructuring proposals that the government will decide on later in the year.

That of course is likely to involve heavy debate within the Coalition, with Vince Cable’s comments on bankers being very different from those of many Conservatives.

However, the appointment of a Banking Commission to come up with recommendations means that the detailed agenda for reform is being set outside of government. As Robert Peston said of the Commission:

The members’ identification of the problems tells you that what they’ll eventually say cannot be anodyne.

Their starting point is that if they were designing a banking system from scratch, it would look almost nothing like the banking system we have.

First and foremost, they believe that it is profoundly unhealthy for the UK to have banks which insist on the freedom to operate how they like (including paying whatever bonuses they like) and yet could not carry on in business without implicit or explicit financial support from taxpayers on a colossal scale.

So one challenge for the commission is to come up with a structural reform that would make banks, bankers, their shareholders and creditors completely liable for the business mistakes of banks’ managements, without putting at risk either the savings of retail depositors or the integrity of the payments and credit-creation systems.

That will mean forcing banks to hold substantially more capital – tens of billions of pounds more – to absorb potential losses … And it will also mean – subject to agreement in the EU (which won’t be simple to obtain) – some kind of credible separation of retail banking and the money-transmission mechanism from banks’ more speculative activities.

Watch this space as they say.