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UK Legislation Would Impose Responsibility Tax on Financial Institutions

By Jim Hamilton

In order to reduce risk taking by financial institutions as part of the overall regulatory reform effort to reduce systemic risk, UK Treasury draft legislation would impose a financial responsibility tax, called a bank levy, on UK banking groups and some US and other foreign banking groups operating in the UK. The tax will be on the total chargeable equity and liabilities as reported in the relevant balance sheets of affected banks and banking groups at the end of a chargeable period. The levy will be set initially at 0.05 percent and raise to a rate of 0.075 per cent in 2012 and thereafter. The bank levy is similar in design and intent to the financial crisis responsibility fee proposed earlier this year by the Obama Administration.

Financial Secretary Mark Hoban said that the bank levy is designed to achieve two broad objectives. First, it will ensure that financial institutions make a fair contribution in respect of the potential risks they pose to the financial system and wider economy. Second, the Minister said that the regime will encourage banks to make greater use of more stable sources of funding, such as long-term debt and equity.

The bank levy will apply to the global consolidated balance sheet of UK banking groups and building societies; a proportion of the balance sheets of foreign banks operating in the UK through permanent branches which are members of foreign banking groups, the balance sheets of UK banks and banking sub-groups in non-banking groups, and the balance sheets of UK banks that are not members of groups.

In determining the chargeable equity and liabilities, the draft legislation excludes Tier 1 capital insofar as it constitutes equity or liabilities. The intent of this exclusion is to incentivize banks to increase their Tier 1 capital in line with wider regulatory reforms aimed at improving financial stability, including higher capital and liquidity standards.

The draft also excludes the first £20 billion of chargeable liabilities. This first £20 billion of liabilities not charged to the bank levy will be apportioned between long and short maturity liabilities in accordance to the proportions of each within the total chargeable equity and liabilities for a chargeable period.

In addition to introducing a bank levy, the UK Government is taking action to tackle unacceptable bank bonuses. The Independent Commission on Banking will look at structural and non-structural measures to reform the banking system and promote competition. Working with international partners, the Government is exploring the costs and benefits of a Financial Activities Tax on profits and remuneration. Separately, the Financial Services Authority is currently revising its remuneration code and provisions will be in place by January 1, 2011 ensuring that bonuses for material risk-takers are deferred over a number of years and are linked to the performance of the employee and their firm. Significant portions of these bonuses will have to be paid in shares or other securities.

Earlier this year the Obama Administration announced that it would seek to impose a 0.15 percent tax on the liabilities of large financial institutions to repay the budgetary expenditures associated with the financial crisis. Covered institutions would include firms that were insured depository institutions, bank holding companies, thrift holding companies, and securities broker-dealers as of January 14, 2010, or that become one of these types of firms thereafter. Both domestic firms and U.S. subsidiaries of foreign firms with assets of more than $50 billion would have been subject to the Financial Crisis Responsibility fee. The proposed nature of the base has evolved during legislative discussion, with the consensus now appearing to be that it comprise total risk weighted assets minus Tier 1 capital and minus FDIC assessed deposits. This financial responsibility fee regime was not included in the Dodd-Frank Act and awaits an appropriate legislative vehicle.

The German government has announced plans to introduce a systemic risk-adjusted levy and a new resolution arrangement for banks and banking groups. The perimeter of the levy includes all banks, and the rate of the levy will be set to reflect systemic risk. Systemic risk will be determined on the basis of, among other things, the size of a bank?s liabilities, excluding capital and deposits, and its interconnectedness with other financial market participants. The purpose of the levy is to mitigate incentives leading to excessive systemic risk by internalizing the negative externalities of systemic relevance. Thus, the German bank levy is designed to be corrective and permanent. The Federal Ministry of Finance is to monitor the level of the levy and the burden on German banks.

Full post as published by Jim Hamilton's World of Securities Regulation on December 10, 2010 (boomark / email).