Shares in NatWest Group PLC (LSE:NWG), Lloyds Banking Group PLC (LSE:LLOY) and Barclays PLC (LSE:BARC) fell sharply after an influential thinktank proposed a tax on bank windfalls from quantitative easing, inspired by a Margaret Thatcher policy in the 1980s.
Ahead of the upcoming autumn budget, the idea has been put forward by the Institute for Public Policy Research (IPPR), which says a tax on commercial banks is needed to "address the unintended consequences of quantitative easing".
The UK taxpayer is spending £22 billion a year compensating the Bank of England for losses on its QE programme, argues the thinktank, which has a stated aim of working towards "a fairer, greener and more prosperous society".
Public funds, it said, are being used to compensate the central bank for interest payments and gilt losses.
The IPPR argued that this mechanism effectively boosts commercial bank profits, as banks hold hundreds of billions of pounds of QE-related reserves.
It noted that the four largest UK banks have more than doubled their annual profits since interest rates began rising in 2021, up £22 billion compared to pre-pandemic levels.
IPPR proposes a 'QE reserves income levy' similar to Thatcher’s 1981 deposit tax, which it estimates could raise £7-8 billion annually.
It also recommends halting the Bank of England’s bond “fire sale” under quantitative tightening, which it says could save £12 billion a year.
Together, the measures could deliver over £100 billion in savings during this parliament.
Carsten Jung, IPPR’s associate director for economic policy, said: "The Bank of England and Treasury bungled the implementation of quantitative easing.
"What started as a programme to boost the economy is now a massive drain on taxpayer money.
"Public money is flowing straight into commercial banks’ coffers because of a flawed policy design."
No other major economy is implementing QE the same way, says Jung, a former BoE economist.
"A targeted levy, inspired by Margaret Thatcher’s own approach in the 1980s, would recoup some these windfalls and put the money to far better use – helping people and the economy, not just bank balance sheets."
Market reaction
Bank shares were leading the falls on the FTSE 100 on Friday morning, after the IPPR proposal was published, with NatWest down 4%, Lloyds down 3.3%, and Barclays 2.9% lower.
HSBC Holdings PLC (LSE:HSBA) and Standard Chartered PLC (LSE:STAN), which are more focused on Asia, were down 0.9% and 0.8%.
On the FTSE 250, Close Brothers Group PLC (LSE:CBG) fell 2%, while Metro Bank Holdings PLC (LSE:MTRO) slid 1%, but OSB Group PLC (LSE:OSB) was little moved.
Lloyds, NatWest, Barclays UK and HSBC UK would face an almost £10 billion charge over two years if the annual levy proposed by the IPPR is introduced, according to banking analyst Tomasz Noetzel at Bloomberg Intelligence.
"This equates to 18%-20% of those banks' combined consensus 2026-27 pretax profit," he said.
However, Noetzel said he believed the proposal is "unlikely to be enacted, as any government measures to ease public finances would need to consider growth implications".
Alternative proposal
An alternative to a bank windfall tax would be for the Bank of England to absorb some of its own losses, as the US Fed and ECB already do, says the New Economics Foundation.
The BoE has received £80 billion from the Treasury since 2022, and is likely to cost around £20 billion a year going forward.
Therefore, following the examples of the Fed and ECB, a change in the management of the central bank balance sheets "could unlock over £130 billion by 2030" the NEF said.
The payments are for the management of quantitative easing (QE) and quantitative tightening (QT).
Under QE, central banks bought government bonds at very low interest rates to stimulate the economy, buying them with newly-created reserves, but now that rates are higher, the central bank is incurring a loss as the current interest rate is higher than the interest received on the bonds it bought.
Active QT, where the bonds are sold back to the market rather than letting them mature, has increased the losses.
While QE was profitable it allowed the Treasury to receive over £120 billion from the Bank between 2012 and 2022, but this has gone the other way, with £70 billion paid over the past two years as losses were charged to the Treasury.
"Fortunately, these costs are not inevitable," the NEF says, with reforms such as tiering reserves, slowing QT and changing the indemnity all options to reduce the costs, and all already implemented in other countries.
“To reverse austerity in public services and invest in vital public infrastructure, changing our approach is vital.”
With the US Fed having noted this year that its losses “do not affect [its] ability to conduct monetary policy or meet its financial obligations," the NEF says UK should question why the BoE cannot absorb more of these costs.
** Update: More details added **