Britain saddled banks with an extra 800 million pounds ($1.3 billion) in tax on Tuesday, drawing protest from the industry as talks between bosses and ministers over bonuses and lending come to a head. Finance Minister George Osborne said he hoped the move would hurry along a deal under the government's Project Merlin, which is designed to encourage banks to lend more and rein in bonuses for top bankers.
-- Tax applies to UK banks, London arms of overseas firms
-- Tax could prompt bank walkout from Project Merlin: BBC
-- Agreement on Project Merlin lending seen this week
"What I am absolutely focused on is two things: One, the banks paying a fair share in tax and making sure that they are contributing to the economic recovery. Second, that they lend to businesses - that is an absolute priority because that is how we are going to get this economy moving," Osborne said.
The British Bankers' Association said it understood the need to raise money from banks but added that "constant chopping and changing risks making the UK a less attractive place for businesses to operate".
Ed Balls, finance spokesman for the opposition Labour party, described the tax as a "damp squib" and a fig leaf designed to hide apparent failure to strike a credible deal on Project Merlin.
The government hopes to announce a Project Merlin deal within the coming week, and Treasury minister Mark Hoban confirmed that plan on Tuesday. However, the BBC reported that the banks would hold talks on Tuesday on whether to walk out of the talks. HSBC, Barclays, Lloyds and Royal Bank of Scotland all declined to comment.
News of the tax and its potential to damage confidence in the banks sector caused sterling to slip against the dollar and the euro, as the levy dented investor sentiment towards the UK and triggered stop-loss orders.
Britain was forced to use taxpayer cash to bail out Lloyds and RBS and prop up the banking system during the credit crisis.
Public anger towards bankers remains fierce as the government tries to hammer out the project Merlin deal, which needs to look tough but be acceptable to the banks. The extra tax imposes the full amount of a levy on bank balance sheets this year instead of phasing it in as previously planned.
The original plan was to collect 1.7 billion pounds this year and ramp up to 2.5 billion for 2012 and subsequent years. Unveiled last June, it is to be charged to British banks and the UK operations of banks from other countries such as Goldman Sachs and Deutsche Bank.
The tax replaces a one-off tax on 2009 bonuses that raised over 3 billion pounds but failed in its central aim of curbing bankers' pay. Analysts estimate the new tax will cost HSBC 500-600 million pounds; Barclays, RBS and Lloyds about 400 million each; and Standard Chartered about 100 million. Banks are expected to agree to a gross business lending target of about 190 billion pounds, subject to demand from creditworthy customers.
France has already introduced a bank levy, and Britain wants other countries to adopt them. The International Monetary Fund (IMF) supports a global tax on liabilities. The levy is due to start in May in the form of a 0.075 percent charge for short-term chargeable liabilities and 0.0375 percent for long-term equity and liabilities.
The share reaction was muted. By 1530 GMT Standard Chartered was down 1.5 percent, Barclays and Royal Bank of Scotland were down by between 0.1 and 0.3 percent, while and HSBC and Lloyds rose by around 1 percent.
Separately, a senior Treasury civil servant said Britain is likely to sell its stakes in part-nationalised Lloyds and RBS in several tranches, rather than in one lump, and Lloyds announced a further 200 job losses on Tuesday, taking the total since the onset of the crisis to 26,200.