UK bank shares experienced a significant decline on Friday, resulting in a loss of approximately £8 billion in market value within hours of trading. The drop was triggered by new calls for a windfall tax on large lenders, proposed in the upcoming autumn budget. The Institute for Public Policy Research (IPPR) think tank has suggested that such a tax could help address a potential shortfall of up to £40 billion in public finances.
Among the major banks, NatWest Group faced the largest decrease, with its share price falling by as much as 5%. Lloyds Banking Group and Barclays followed closely, experiencing declines of 4.5% and 3.6% respectively. HSBC also saw a decrease, dropping more than 1%. By the end of the morning session, the combined notional value of the UK’s biggest banks had diminished by £7.9 billion.
The IPPR’s report argues that a new levy on banks would allow the government to recoup “windfalls” generated as a result of the Bank of England’s quantitative easing policy, which was implemented following the 2008 financial crisis. This policy involved the purchase of £895 billion in bonds from banks, significantly boosting their reserves at the central bank. These reserves have accrued interest at the current base rate of 4%, but as the Bank of England moves towards quantitative tightening, it now faces annual losses of £22 billion on these operations.
The IPPR recommends a tax structure similar to the bank levy introduced by former Conservative Prime Minister Margaret Thatcher in 1981. The think tank argues that the proposed tax would redistribute profits more effectively, supporting broader economic and social needs rather than merely bolstering bank balance sheets.
Despite the political momentum behind the proposal, some market experts are warning of potential repercussions. Neil Wilson, an investor strategist at Saxo Markets, expressed concern that a new tax could conflict with the Labour Party’s narrative regarding the financial sector’s role in driving economic growth. “Does it align with a pro-growth agenda if you constrain their ability to create new money by lending?” he questioned.
Additionally, Richard Hunter, head of markets at Interactive Investor, noted that any proposal for a windfall tax could have a disproportionately negative impact on market sentiment, given the government’s pressing need to increase revenue amid its financial challenges.
As the autumn budget approaches, the discussions around taxation on banks will likely continue to shape investor confidence and market dynamics in the UK banking sector.
