HEARD ON THE STREET: UK Levy Not Too Taxing For Banks

By Simon Nixon A DOW JONES COLUMN Following an election in which bank-bashing figured prominently, the U.K. banking sector can count itself lucky with the coalition government's emergency budget. Although Chancellor George Osborne is pushing ahead unilaterally with a bank levy, it is only expected to raise GBP1.2 billion this year, rising to GBP2.4 billion in 2012-2013. It has been cleverly constructed to encourage banks to fund themselves more conservatively in future, which should help make the financial system safer. And the banks should be able to take the financial impact of the new levy in their stride, without damage to the U.K. economy or the City of London. Banks will pay 0.07% of their total liabilities less the value of their Tier 1 capital and insured deposits. Liabilities with a maturity of more than one year will only be charged half the full rate. Areas still subject to consultation include the extent of any double taxation relief if other countries include similar levies; what qualifies as insured deposits; and how the tax will be calculated for foreign bank branches which don't have separate U.K. balance sheets. Lloyds Banking Group, Royal Bank of Scotland and Barclays will be hardest hit, since they make the most use of wholesale funding. HSBC, which has a global loan to deposit ratio of 80%, is relatively less exposed and will also benefit from the budget reduction in corporation tax. True, there's a risk some of the cost could be passed on to bank customers via higher credit costs, slowing the recovery. But fears the tax could drive banks offshore look overblown--regardless of whether the U.K., with allies France and Germany, succeeds in persuading other G-20 countries to follow suit. (Simon Nixon is European editor of Heard on the Street. He can be contacted on +44 207 842 9206 and simon.nixon@wsj.com) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 22, 2010 14:13 ET (18:13 GMT)