By Chris Dorrell
Banks should pass on higher interest rates to savers in order to stave off pressure for a windfall tax, a host of experts have warned.
Calls for a windfall tax on the banking sector have grown after most of the UK’s largest lenders recorded strong profits in their latest results.
After a decade of ultra-low interest rates, sharp rate hikes throughout 2022 widened banks’ net interest margins – the difference between what banks pay out and receive in interest – and earned them bumper profits.
NatWest recorded its best performance since the financial crisis in 2022 while Lloyds’ profit rose 80 per cent in the final quarter of the year. HSBC UK and Barclays UK also recorded very strong years.
In the wake of the results, Positive Money said “a windfall tax on banks is necessary today for the same reason the Thatcher government deemed it necessary in the early 1980s.”
“Banks are seeing their incomes soar not from any increased efficiency or better service to customers, but simply as a side-effect of higher interest rates,” he continued
Head of banking and finance at MHA Greg Taylor agreed, saying it is “hard to argue against windfall taxes on banks” especially given the current cost of living crisis.
However, Taylor recommended that any windfall tax should have a sunset clause ensuring the tax falls away after three years in order to retain competitiveness. “Hopefully by then we will have ridden out the current volatile economic conditions,” he said.
But analysts warned that imposing a windfall tax on the sector would cause more harm than good, putting off investment in a sector that already faces high taxes.
Bank’s face two separate additional charges: the bank surcharge and the bank levy.
While the bank surcharge, which is currently eight per cent, will soon be reduced to three per cent, this reduction will be offset by the planned increase in corporation tax to 25 per cent.
The bank levy, introduced after the financial crisis, is a separate annual charge on a bank’s balance sheet.
Martin Hartley, UK Managing Director of emagine and a member of the Bank of England Decision Maker Panel asked “Why should a well-run commercial enterprise, which employs thousands of people…be penalised for its success by contributing to huge tax bills?”
“The introduction of windfall taxes will hinder investment and innovation in the sector as it massively reduces the reward for such companies.”
Alesandro Hatami, co-author of Reinventing Banking and Finance, said “a windfall tax would introduce a level of arbitrariness to a sector that requires stability.”
However, Hatami did suggest that there should be greater regulation to ensure that consumers saw the benefits of higher interest rates.
“What’s needed instead is a change in regulation,” he said, suggesting new rules could mandate banks to transfer advantageous changes in the base rate to savings customers within a specified time frame.
Head of financial services EMEA & APAC at Publicis Sapient Sudeepto Mukherjee said “banks should be encouraged to pass more of the interest rate rises to deposit holders” but suggested the conversation should be more focused on “increasing collaboration with the government” in order to direct more capital to investment.
Banks have faced a great degree of scrutiny from legislators for not passing on higher interest rates to customers’ savings accounts. The Bank of England has increased its base rate to four per cent, but in most cases the interest rate banks’ savings products still remain much lower.
“It is difficult to avoid the conclusion that our biggest banks are taking advantage of their most loyal customers to increase profits and CEO pay,” chair of the Treasury Committee Harriet Baldwin said.
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