From City AM:
BRITAIN’S lenders face having to pay the bank levy forever, as the chancellor yesterday revealed that the crisis-era tax was here to stay...
“I think the bank levy is going to be here to stay. It is perfectly reasonable as a society to ask the banking sector to make a contribution,” the chancellor told MPs on the treasury select committee.
“I was very clear in 2010 when I replaced the bonus tax with the bank levy, that the bank levy was a more effective way of getting the banking sector to make contributions.”
It is and it does.
Osborne hiked the levy for the ninth time in his Budget last week, increasing it to 0.21 per cent of UK banks’ global balance sheets. The initial plan was to set it at just 0.05 per cent of the balance sheet.
Osborne had targeted revenues of £2.5bn from the tax, hiking the rate as banks shrank in order to maintain that level of revenue. But under the latest plan, it will increase to take £3.7bn per year.
That's part of the point; to get banks to "shrink their balance sheets"; in other words to stop making the very low margin but high risk loans to land price speculators. So to keep revenues constant, the headline rate has to increase.
It's still only a paltry 0.21% though, which barely nibbles into banks' overall lending margin of 2% (i.e. mortgage interest average 3%, deposit interest average 1%, or whatever).
Analysts fear that such a large loss from the banking system will have larger ramifications for the wider economy.
"Large loss"? Get a grip. Banks hand out £10 billion a year in bonuses; the financial sector boasts that it pays over £50 billion a year in tax (mainly PAYE plus corporation tax and other bits and pieces). UK gross bank balance sheets are in the many trillions; if you net off inter-bank lending and other pure accounting entries, they are about £1,800 billion. Check: £1,800 billion x 0.21% = £3.8 billion.
“If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy,” said analyst Joseph Dickerson from Jefferies. “I’m not sure it makes a lot of economic sense. It is like a sin tax, like on cigarettes, and governments usually like to have more taxes.”
Loans create deposits (especially in a land price fuelled bubble system). The constraint is what people are willing to borrow; once they've 'borrowed' that freshly printed money, it goes straight back into the banking system as a deposit.
The mechanism by which the bank asset tax depresses lending volumes is because the very, very low margin loans are no longer profitable; hence and why the sensible medium term policy would be to hike the bank asset tax to 1% or even 2% of assets (there are plenty of other bad taxes we could get rid of, like Stamp Duty or the 45% income tax rate, just to make it fair all round and fiscally neutral).
Dinero adds: "Bank capital is paid in capital. Its not derived from lending. See the document. Basel III capital"
1. Where did I say that "bank capital" was derived from lending? I didn't, that is an irrelevance and not central to this debate. I said that "loans create deposits". A well run bank doesn't actually need any share capital (Basel notwithstanding), and strictly speaking, building societies do not have any share capital at all.
2. If bank capital is issued in exchange for cash, then what does that cash represent? Ultimately it represents somebody else's debt. If different people have some spare cash, they can either give it to the bank as a deposit, or give it to the bank in exchange for new shares (or half-way house, give it to the bank for bonds). It's a legal distinction rather than an economic one.
Dinero again: "and so the statement "If that £3.7bn was capital that banks levered up into lending, that is easily £75bn of lending that could have been provided to the economy," is broadly correct."
No it's broadly complete and utter bollocks, this is special pleading put out by the banksters. The total amount they can lend is restricted only by the amount that people are prepared to borrow. Whatever they lend out comes straight back in again, as deposits, as bonds or as share capital. If they want people to put the money back in as share capital rather than deposits, they will just reduce interest on deposits and increase dividends on shares.
"Capital adequacy requirement is to be 10%
Mortgages have a risk weighting of 1/2
3.7 bn times 10 = 37
37 times 2 = £74 Bn
the £3.7 Billion goes from retained earnings, bank capital and so is no longer available for the capital adequacy criteria."
Read the post! That £3.7 bn is only a very modest increase in their current overall tax bills and only one-third of the bonuses they award themselves.
And finally... lending to land speculators (akak "mortgages") is not lending to "the economy", is it? It's just an increase in debts for some people and deposits for other people.
Dinero: "" If they want people to put the money back in as share capital rather than deposits, they will just reduce interest on deposits and increase dividends on shares."
That would only work if people were happy to convert their no risk deposit at the bank to an at risk capital at the bank. That would satisfy capital adequacy, but its not very likely to happen."
Apply common sense or read my earlier post "Economic Myths: Gearing reduces the cost of capital".
The total 'risk' of borrower defaults etc. faced by 'the bank' is the same however it is funded. And that 'risk' is ultimately borne by its funders (be they depositors, bondholders or shareholders).
From a depositor's point of view, the more share capital there is, the safer he is.
But the same applies to shareholders. The more share capital there is, the safer each individual one is.
Imagine a bank that was ONLY funded by share capital. The shares would be very, very safe indeed. Even Northern Rock only managed to lose about 5% of the money it had lent out on reckless mortgages.
Or imagine a bank that was ONLY funded by deposits, i.e. a building society in the good old days. Putting your money in a building society is technically slightly riskier than in a bank, but the difference is negligible and nobody ever gave it a second thought.
(The £85,000 deposit guarantee clouds this picture, but then the government always does.)
Dinero: "People would not want to convert their deposits to share capital..."
Yes they would, I just explained that. If a mortgage bank were 100% funded by share capital, then its shares would trade at close to par and be easily buy-able and sellable; banks would redeem them when they had spare cash, pay very modest dividends that are only slightly more than normal deposit interest, and worst case in really bad years, you'd not get any dividends. They would be so close to being 'cash' as makes no difference.
"... and so that is not a route by which the retained earnings that are transferr5ed to the HM Treasury's custody by the levy could be replaced. So the amount of assets allowed to be held in line the capital adequacy regulation is reduced by the bank levy. "
A tax is a tax is a tax. Banks already claim that they pay £50 billion a year in tax, what's another £3.7bn?
That tax can be paid out of retained profits (i.e. share capital); or it can be paid by reducing deposit interest, or the banks could reduce bankers' bonuses by one-third. Or downsize their palatial head offices a bit etc etc etc.
The quoted bankster is talking shit, you can bend and twist it any way you like. If you follow that fucker's logic, banks should not pay any tax at all.
Wednesday, 25 March 2015
From City AM: