Banks brace for shock raid on rates windfall: Government could target £10bn of interest on deposits held at BoE as it tries to steady markets
- Chancellor under pressure over his ambitious £43bn tax-cutting programme
- His mini-Budget sent pound into a dive and prompted volatility in bond markets
- Treasury weighing up a number of options to tap banks for cash
Britain’s biggest banks could face a huge windfall raid as Chancellor Kwasi Kwarteng scrambles to placate the financial markets.
City sources say the Government may target an estimated £10billion of interest payments due to be paid on hundreds of billions of pounds in deposits which commercial lenders have placed with the Bank of England.
The interest on these has been spiralling upwards this year as the base rate has soared – and it is set to rise even higher.
In the slow lane: Chancellor Kwasi Kwarteng’s mini-Budget sent the pound into a dive
The Chancellor is under pressure to provide details of how he will pay for his ambitious £43billion tax-cutting programme aimed at boosting growth.
His mini-Budget sent the pound into a dive and prompted unprecedented volatility in the normally slow-moving bond markets, where the cost of government borrowing has been sky-rocketing.
It is understood that the Treasury is weighing up a number of options to tap banks for cash. These include scrapping the interest which the Bank of England pays on some deposits held by lenders – mainly high street banks including Lloyds, NatWest and HSBC.
The amount of commercial bank reserves held at the Bank of England has soared in recent years because of its policy of quantitative easing – or electronic money printing. This involved the central bank buying government IOUs – known as gilts – from financial institutions and creating an equal amount of deposits held by commercial lenders at the Bank.
Initially this yielded little income for the banks as interest rates were at rock-bottom. But this year – as the Bank of England hiked base rates in an attempt to curb inflation – banks have enjoyed an interest rate bonanza on these deposits. Cash balances at the Bank of England currently earn the base rate of 2.25 per cent, but traders are betting that the official cost of borrowing will hit 5 per cent by early next year.
One idea under consideration is ‘tiering’ – where interest would no longer be paid on a set amount of cash balances.
The Treasury could save an initial £10billion a year if no interest was paid on a quarter of all cash reserves held by UK financial institutions at the Bank of England, according to investment bank Numis. That would reduce annual profits at the major UK lenders by roughly a fifth, Numis added.
Julian Jessop, an independent economist who has advised Prime Minister Liz Truss, said: ‘The banks would hate it, but personally I would support not paying interest on some or all of central bank reserves, which are effectively cash anyway.’
Banks do not disclose their cash balances held at the Bank of England. There is no minimum level required. But analysts at Barclays believe cash balances held at the Bank have grown by £160billion in three years.
It says NatWest – where the taxpayer still holds a 48.5 per cent stake – has seen the biggest rise in deposits and now holds almost £150billion in reserves at the central bank, more than twice as much as three years ago.
‘This is a sizeable source of net interest income for UK banks,’ Barclays added.
Banks are expected to report bumper profits at the end of this month, partly as a result of rising interest rates. But their shares have fallen in recent weeks amid growing fears they could be hit with a tax on their reserves as well as worries that they will have to write off large sums due to business and personal customers being unable to repay debt.
The issue of tiering dominated discussion at a dinner hosted by trade body TheCityUK at last week’s Tory party conference in Birmingham. The move would have a similar effect to a windfall tax. Truss opposes these and has ruled out imposing another levy on energy firms to pay for a package of up to £150billion to ease pressure on households and businesses.
But any raid on bank profits could be presented differently and Ministers could argue it is technically not a windfall levy. One analyst said: ‘The advantage politically is that this wouldn’t be a tax as such. The Treasury would just be paying less interest to the banks.’
In his controversial mini-Budget last month, Kwarteng kept the 8 per cent surcharge on bank profits that is paid on top of corporation tax. It is one of several levies on banks introduced after the 2008 financial crisis.
UK Finance, which represents the banking industry, declined to comment. The Bank of England said tiering ‘would effectively introduce a tax on the banking system’. Last night the Treasury appeared to play down the tiering proposal, saying it ‘risks damaging the UK’s fiscal credibility’.