UK Bank Shares Fall as New Tax Proposal Raises Concerns

British banks experienced a notable decline in their share prices following reports that the UK government is considering imposing new taxes on the sector. This potential tax is aimed at addressing a significant budget shortfall. Shares of major banks such as NatWest, Lloyds, and Barclays were particularly affected, with NatWest dropping more than 4.7% just before midday in Europe. Lloyds saw a decrease of 4.5%, while Barclays fell by 3.7%. This downturn also impacted the broader market, with the FTSE 100 index down nearly 0.4% at the time of reporting.

Proposed Tax and Economic Implications

The suggestion for a new bank tax originated from the Institute for Public Policy Research (IPPR), which presented its proposal to the UK government. The think tank advocates for levying charges on commercial banks to help offset the financial burden resulting from the Bank of England’s extensive government bond purchasing, a strategy known as “quantitative easing” (QE). The IPPR forecasted that this could cost taxpayers approximately £22 billion (€25.4 billion) annually throughout the current parliamentary term.

Quantitative easing has previously been a tool for enhancing the UK economy, generating substantial profits. However, since December 2021, the Bank of England’s interest rates have surged from near zero to a peak of 5.25%, adversely affecting the program and leading to interest-related losses. The IPPR’s report suggests that the government could partially recover these losses by implementing a “QE reserves income levy” on banks.

While it remains unclear how the government will respond to this proposal, analysts express concern that higher taxes could hinder economic growth in the UK. Russ Mould, investment director at AJ Bell, articulated the dilemma: “The issue is whether taxing the banks more will end up stifling the very growth the government is keen to foster by crimping lending to businesses and households alike.”

Public Sentiment and Bank Performance

Despite potential drawbacks, public sentiment may lean towards supporting the proposal. Analysts project that banks such as HSBC, Barclays, NatWest, and Lloyds could collectively earn around £44 billion (€50.7 billion) globally in 2025, marking their third-best performance year, following 2023 and 2024. Mould noted, “These companies have enjoyed a strong run on the stock market in recent years, and they’ve also played an important role in lending money to small and large businesses, which helps to create jobs and support the UK economy.”

As discussions around the proposed tax continue, its potential implications for the banking sector and the wider economy will remain a crucial topic for policymakers and investors alike.