The Bank Levy rate will be increased to 0.156% from 1 January 2014. The half–rate that applies to long term liabilities will be correspondingly increased to 0.078%.
Following a review of the Bank Levy during 2013, the Government will introduce legislation to:
• limit the protected deposit exclusion to amounts insured under a deposit protection scheme
• treat all derivative contracts as short-term liabilities
• restrict relief for a bank’s High Quality Liquid Assets (HQLA) to the half-rate
• align the Bank Levy definition of Tier One capital with the new Capital Requirements Directive (from January 2014)
• exclude liabilities in respect of collateral that has been passed on to a central counterparty (from January 2014)
• widen legislation-making powers within the Bank Levy from Royal Assent to ensure it can be kept in line with regulation.
These changes will take effect from January 2015, unless stated otherwise.
Who will be affected?
Approximately 30–40 large banking groups operating in the UK.
The increase in the Bank Levy rate will apply from 1 January 2014.
The changes to protected deposits, derivatives and HQLA will apply from 1 January 2015.
The changes to the definition of capital and collateral passed to central counterparties will apply from 1 January 2014.
A response to the consultation will be published alongside draft legislation on 10 December 2013.
This is the seventh rise in the Bank Levy rate, which is an extraordinary rise given that the tax was first applied in 2011. This represents a 10% increase over the previously announced rate (in March 2013).
The rate rises reflect the fact that the yield continues to undershoot the Chancellor’s target of £2.9bn, largely due to bank’s continuing to shrink their balance sheets and improve their funding profile. The estimated yield for the current year £2.2bn.
The consultation process during 2013 has resulted in several changes, all of which are in line with our expectations.
We expect that the overall impact of the changes should cause a small increase in the proportion of the Bank Levy paid by foreign banks. The large UK banks already pay approximately 70% of the total Bank Levy.
The changes to align the definition of capital and relief for collateral held at central counterparties are positive. Regulators are encouraging banks to clear transactions through central counterparties, so providing relief from Bank Levy for collateral held there reflects a joined–up approach. Further changes may be required as other regulatory changes come into play, so the ability to make changes through secondary legislation is also welcome.
The Bank Levy represents a significant cost to the banking sector (and the effective cost is higher as the Bank Levy is not deductible for corporation tax purposes). Bank Levy is viewed as a tax on being UK domiciled by the UK banks, whose Bank Levy is calculated on their global balance sheets.
We remain concerned that, as banks continue to deleverage, the rate of Bank Levy will need to continue to rise to meet the Chancellor’s target yield. At some point this could affect pricing and the availability of credit.