Budget: Banks to pay levy in UK, France and Germany

It is expected to generate £2 billion in annual revenues.

Chancellor George Osborne announced the levy in today’s emergency budget, justifying the tax by saying: “We must remember that this was a crisis that started in the banking sector.”

He said: “The failures of the banks imposed a huge cost on the rest of society. So I believe it is fair and it is right that in future banks should make a more appropriate contribution, which reflects the many risks they generate.”

The International Monetary Fund had already suggested a bank levy, but Osborne said that the UK government had decided to “take the initiative in the global debate about the appropriate risks and rewards in international banking.”

France and Germany have also committed to imposing a bank levy said Osborne: “Indeed I can tell the House that the French and Germans have joined the UK today in committing to introduce a bank balance sheet levy. In a joint statement, our three governments have pledged to ensure our banks make a fair contribution to reflect the risks they pose.”

Details of the levy were thin on the ground in the speech, but the Chancellor said: “From January 2011, we will introduce a bank levy. It will apply to the balance sheets of UK banks and building societies, and to the UK operations of banks from abroad. There will be deductions for Tier one capital and insured retail deposits, and a lower rate for longer maturity funding. Smaller banks with liabilities below a certain level will not be liable for the levy.”

Osborne also added that the government is exploring the costs and benefits of a Financial Activities Tax, on profits and remuneration, and said: “We will work with international partners to secure agreement.”

The British Bankers’ Association released a statement immediately after the budget which said: "The banking industry fully understands the part it must play in helping the UK’s economic recovery. We know this is a difficult budget for everyone and the banking industry will work to meet its obligations in helping bring the economy back to strength.

"The banks are committed to working with the government to ensure new bank levies balance tax raising objectives with the need to keep the recovery moving, and for banks to contribute to economic growth through continued support for the wider economy by lending to businesses and individuals.

"The UK is a trading nation and we must ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here. This levy is to apply to all major banks and building societies operating in the UK regardless of nationality.

“We are a large financial centre and a great many jobs are created here as a result. The industry does business globally but pays its taxes in Britain. The UK is not the only country creating some form of bank levy. So bank levies need to be co-ordinated internationally: they must not prevent the industry in the UK from being able to compete. It is essential that the international banks do not find themselves taxed multiple times for the same thing."

But Financial author Lawrence Galitz, founder of the global financial training company, ACF Consultants said the new tax on banks is large enough to reverse recent economic growth and could stunt the City’s growth spurt and take us back into recession.

He said: “The large new levy on banks may be one step too far in terms of new financial restrictions and could cause a double-dip recession. The Chancellor should just be taxing a bank’s profits. Taxing their balance sheet will have knock-on effects that could reverse the recent economic growth.

“Banks have had a lot of pressure applied since the start of the financial crisis and now they’re showing some green shoots rather than being protected, they’re being hit with more restrictions. Taxing the banks to raise £2 billion is double the figure that was originally mooted.”