Bank levy raised but what are the real issues?

George Osborne today announced that the bank levy will be raised.  The original levy was expected to raise £2.5bn annually but a smaller amount in the first year because the government had decided banks were in too fragile a state to pay the full amount.  The change is expected to increase revenue from the levy by £800m for the 2011 calendar year.  The view now is that the banks are in a stronger position than had been expected and so can pay the levy.  The increased revenue is welcome and brings the government more into line with Labour's perspective.

However, ultimately this is a side-show.  A levy creams off some excess income.  It does not address the fundamental issue, which is that very little has been done to prevent banks from threatening to bring down the whole financial system again.

The government and the banks have been in talks for some weeks now under the title of something called Project Merlin.  Apparently in return for 'drawing a line' under criticism of the banks, the idea is that banks will agree to lend more to small and medium-sized businesses.  Quite why these talks have become bogged down is a mystery.  It probably suggests the government cannot promise much (because the public is not yet willing to stop blaming the banks for the recession) and also that the banks are not budging on much (which in turn is quite staggering).

The banking sector appears to be acting like - and is being treated as - an oligopoly.  Despite requiring the biggest bail-outs and nationalisations in history, banks retain and exercise substantial power.  Perhaps the government's Indpendent Commision on Banking will stir things up and recommend a dose of healthy competition.  What is needed is some sort of reform aimed at separating retail/utility banking activities from those that are higher risk (and which rely on those utility activities because they come with taxpayer guarantees attached).  This matters because we cannot afford another recession like the last one, with the impact on jobs, families, and public spending.

Meanwhile, what does the government plan to do with the extra £800m it will raise?  Will it support a fuel tax cut?

Stephen Beer, 08/02/2011

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