Market News

BY Kalyeena Makortoff Banking correspondent

UK bank shares tumbled on Friday, cutting the combined stock market value of some of the biggest companies in the sector by more than £6bn, as fresh calls for a windfall tax on large lenders in the autumn budget spooked investors.

Calls for a tax grab, in a paper written by the Institute for Public Policy Research (IPPR) thinktank, took a toll on some of the UK’s biggest high street banks.

NatWest was the biggest faller on the FTSE 100 on Friday, down nearly 5%. Shares in Lloyds Banking Group fell more than 3% and Barclays was down 2%. HSBC shares fell nearly 1%.

The falls cut the market value of the banks by a total of about £6.4bn.

Rumours are swirling over a number of potential tax increases – including on banks, property and landlords’ rental income – which could help the chancellor, Rachel Reeves, plug a shortfall of up to £40bn in the public finances.

The IPPR’s report calls for a new tax on the big banks that would help to recover “windfalls” enjoyed by lenders as a result of an emergency economic policy known as quantitative easing, which was put in place after the 2008 financial crisis.

The policy involved the Bank of England buying up £895bn of bonds from the UK’s banks and crediting them with reserves at the Bank. Those reserves subsequently accrued interest at the central bank’s base interest rate: currently at 4%.

While the Bank of England is winding down QE – a process known as quantitative tightening – the central bank is now paying out higher interest rates on banks’ reserves than it is receiving on the bonds it holds. That has resulted in a £22bn-a-year loss to the public finances, according to the IPPR.

The IPPR is now recommending a new bank levy, akin to a tax on deposits introduced by the Conservative prime minister Margaret Thatcher in 1981. The thinktank said it would help “recoup some of these windfalls and put the money to far better use, helping people and the economy, not just bank balance sheets”.

However, Neil Wilson, the UK investor strategist at Saxo Markets, said that while banks were “easy pickings politically”, a fresh tax would not align with Labour’s message about the City’s role in spurring growth. “Does it chime with a pro-growth agenda if you constrain their ability to create new [money] by lending?”

Richard Hunter, the head of markets at Interactive Investor, also cautioned that any suggestion of a windfall tax was “likely to have an exaggerated impact given the government’s obvious need to raise more income in an attempt to mitigate its financial difficulties”.