Shares in UK domestic banks have taken a knock after renewed speculation over a so-called "tax raid" in the upcoming Autumn Statement.
But analysts suggest the market may be overreacting, again.
A combination of media reports and policy proposals has reignited fears of fresh levies on the sector, with suggestions ranging from a windfall tax on interest income to changes in how banks are paid on their reserves at the Bank of England.
The immediate spark was an article in the Financial Times, followed by a proposal from the Institute for Public Policy Research (IPPR) to review reserve remuneration.
This is a theme echoed in a previously leaked memo from Deputy Prime Minister Angela Rayner. Domestic bank shares fell 4 to 5% on the day.
Citi’s take? Don’t panic. “Neither the FT article, nor the IPPR proposals, add anything new,” it writes, noting that similar ideas have been circulating for years.
Citi first raised the topic in 2022, and it has cropped up repeatedly since, most recently in the Reform Party’s election manifesto. The core concern remains the same: policies like this could backfire.
Deutsche Bank, while more cautious in tone, broadly agrees. It warns that talk of an "excess reserve levy" could weigh on sentiment in the run-up to the Autumn Budget, due in late October.
It estimates that, in the worst-case scenario, such a levy could shave as much as 20% off sector earnings, with NatWest particularly exposed.
But this, Deutsche stresses, is an extreme case. “This type of levy is highly problematic and unlikely in our view,” the bank writes.
It cites four major hurdles: the difficulty of calculating reserve levels at an individual bank level, the potential for the measure to reduce banks’ use of liquidity facilities, the disproportionate effect on building societies with already thin margins, and the risk of distorting monetary policy transmission.
Even under more moderate assumptions, such as a £5 billion annual levy, Deutsche estimates a 10% earnings hit to the sector. But history suggests markets tend to overreact to early noise. “Typically, the news is worse than the reality,” Noble adds. Once policies are clarified, share prices often rebound.
The political backdrop complicates matters. With a general election likely next year, banking policy is back in the crosshairs, not least because the sector is one of the few left with visibly rising profits.
But the economic case for punitive taxation remains weak, especially if it risks throttling credit or undermining monetary flexibility.