Fears are growing that the Government’s new charge on bank profits could prevent billions of pounds in lending.
In July’s Budget, Chancellor George Osborne announced plans to gradually reduce the levy imposed on banks and instead bring in an 8 per cent surcharge on profits from next January.
The surcharge will apply to institutions recording more than £25m in annual profits while the levy will drop from 0.21 per cent to 0.1 per cent by 2021.
The Building Societies Association argues the new levy will unfairly target its largest members because, unlike banks, they are unable to raise capital through methods other than retained profits. It has estimated that the biggest mutuals will be hit with an additional annual tax bill of £126m, which could support as much as £20bn over the next five years.
Go back a couple of years and losing £4bn would have been a big blow to the sector but commentators have described it as “small beer” in today’s larger market.
However, since the financial crisis, mutuals have been known for their innovation and their willingness to operate in more niche areas.
While we do not know for sure that the tax will lead to less lending from the larger societies, the big concern would be if these firms pulled out of areas that catered for more unusual circumstances.
The BSA is in talks with the Government about reforming the levy. Given that building societies cannot issue shares like banks, it may be a good idea to introduce a carve-out for mutuals to ensure they are not more severely hamstrung by the surcharge. Mutuals occupy a vital space in the market so anything that would penalise them would be damaging.