Bank Tax Fears Wipe Billions Off UK Lenders Market Value

London’s top high street banks suffered a sharp fall in market value as concerns mounted over a potential windfall tax rise to shore up government finances. More than £6 billion was erased from the stock market capitalisation of the UK’s four largest listed lenders – NatWest, Lloyds Banking Group, Barclays and HSBC – after a leading think tank urged Chancellor Rachel Reeves to introduce a fresh levy on the sector.

The Institute for Public Policy Research’s recommendation added fuel to ongoing speculation within the City that the upcoming autumn budget could see a tax raid targeting bank profits. With government U-turns on welfare reform and the winter fuel allowance, as well as mounting government borrowing costs, the Treasury faces a significant shortfall. Banks, which have benefitted from robust profits on the back of higher interest rates, are now seen as a prime source of additional tax revenue.

Senior figures in the banking industry have cautioned ministers against any increase in levies, highlighting the current heavy tax burden already borne by the sector. Besides the standard corporation tax, banks face a dedicated surcharge and a separate balance sheet levy. Executives stress that upping the tax take could clash with Reeves’s pledge to make financial services central to the country’s economic renewal, particularly as regulatory easing is underway to spur City growth.

Markets analyst Benjamin Toms of RBC Capital Markets warned that further bank taxes risk hampering the nation’s economic prospects rather than supporting them. The IPPR contends a new levy is justified. According to the think tank, unintended consequences of the Bank of England’s quantitative easing between 2009 and 2021 have handed commercial lenders significant windfall profits. The Bank’s bond-buying programme saw lenders’ reserves with the central bank swell, and these now yield higher interest amidst a 4 per cent base rate environment. Simultaneously, the Bank is incurring losses on its bond holdings, now covered by taxpayer money via the Treasury.

The IPPR indicated that Bank of England losses could cost the Treasury £22 billion annually throughout this parliament, with much of this funding feeding directly into banks’ income. Their solution is a specific ‘QE reserves income levy’ on lenders’ central bank deposits. The mere possibility of such a tax sent NatWest shares down by 4.9 per cent, Lloyds by 3.4 per cent, Barclays by 2.2 per cent and HSBC by 1 per cent.

If the government proceeds, the impact on investor sentiment would be marked. The Treasury, meanwhile, continues to assert that UK economic growth remains its primary focus and that tax and spending changes are not the only tools at its disposal.