Shares in British banks fell Friday after a leading centre-left think tank suggested the government introduce a new levy on commercial lenders, citing billions in interest payments from the Bank of England (BoE) that could otherwise fund public services.
The FTSE 350 Banks index was down 2.3% as of 08:00 GMT. Lloyds Banking Group (LSE:LLOY) led the decline, sliding 3.8%, followed by Barclays (LSE:BARC) with a 3.6% drop. Metro Bank (LSE:MTRO) fell 2.6%, NatWest Group (LSE:NWG) 1.5%, Standard Chartered PLC (LSE:STAN) 1.4%, and HSBC (LSE:HSBA) 1.2%.
The Institute for Public Policy Research (IPPR) estimated that roughly £22 billion ($29.7 billion) annually flows to banks via the BoE’s quantitative easing programme. Originally designed to stabilise the economy during the financial crisis, the programme now provides substantial interest income for lenders amid higher rates.
“What started as a programme to boost the economy is now a massive drain on taxpayer money,” said Carsten Jung, associate director for economic policy at the IPPR. “Public money is flowing straight into commercial banks’ coffers because of a flawed policy design.”
The think tank argued that taxing these payments would give finance minister Rachel Reeves additional fiscal room, as she faces pressure to tighten government finances. Reeves is expected to announce further tax measures in the autumn budget, following last year’s employer levy increases, amid concerns her fiscal targets may slip.
British banks hold significant deposits at the BoE, much of which was created through the central bank’s bond-buying programmes. The BoE pays its policy rate on these balances, generating windfalls for banks under the current higher interest rate environment. Any losses to the central bank are ultimately covered by the Treasury, and thus by taxpayers.
Governor Andrew Bailey has defended the policy, arguing it is crucial to ensure official rate changes pass through to households and businesses. In June, he dismissed renewed criticism of the BoE’s bond activities, which politicians such as Reform UK’s Nigel Farage have labelled excessively costly.
Earlier this year, Bailey and Reeves discussed a possible revised system for reserve provision, which could allow the BoE to earn income and offset some QE-related losses. The IPPR’s proposal echoes previous suggestions, including 2022 comments from former deputy governor Paul Tucker, who recommended that ministers reassess the policy of paying interest on bank reserves.
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