The Bank of England (Yui Mok/PA)
(Picture: PA Wire)AS we brace ourselves for what we’ve been told will be “tough decisions” in the weeks ahead as the Government attempts to plug the public spending gap, one measure is staring them in the face. At a stroke it could solve all our funding needs and avoid a great deal of pain elsewhere.
This is targeting the interest paid on large reserves held by commercial banks at the Bank of England overnight. Reducing or stopping the payments could raise tens of billions.
Interest rates have risen, meaning lenders are receiving higher returns on the more than £800bn they have deposited at the Bank. But this is money they received under the quantitative easing or QE programme launched by the Bank to provide financial stability and economic stimulus after the banking crash 14 years ago.
In other words, it was a rescue package brought about by their own greed. Beginning in 2009, QE went on for far too long and the banks have come to regard it as a fantastic earner. The least they could do now is put their hands up, and acknowledge the moral case for paying up.
Currently, they’re receiving interest on these “reserves” at the Bank’s official rate of 2.25 per cent. That could be trimmed or taken down to zero. The banks say it is a “stealth tax” but this was cash pumped into the system after their appalling behaviour almost brought the world’s markets to their knees.
Instead of being seen as an emergency stop-gap, as was intended, QE became a permanent feature, used to tackle different episodes of financial turbulence as they arose in the intervening years, and was taken for granted. The banks could not believe their luck.
Of course they bleat the usual arguments. Hitting them like this would mean they would have to clawback the lost profits via another route, by slapping costs on to the consumer. It would see UK banks suffer in relation to their European and US competitors.
To which the polite answer is “phooey”. There are much ruder ones.
This was unbelievably easy profit. It demanded no risk, no hard yards. It’s been likened to someone finding a pile of cash stuffed behind the sofa - manna from heaven in other words. And all because, let us not lose sight of his, they were so careless and reckless in the first place.
Sadly, the person who should be supporting the idea of targeting the banks’ QE bonanza, the Bank governor, Andrew Bailey, does not want to know. Within the imposing walls of the Bank, it’s become a totemic issue, a matter of principle. “It is a tax on the banking system. It is not monetary policy; it is fiscal policy,” said Bailey.
Yes, it is a tax on the banking system and what is wrong with that? Yes, it is fiscal policy. Again, so what? He does not like it because it would see the Bank being used as an instrument of taxation and therefore would impinge on its much-treasured independence.
Again, “yes, but”. QE was never designed to have this lasting effect. It sticks in many craws that the banks are able to cash-in for doing nothing - in fact, if you think about it, for having done something reprehensible and nearly bringing the entire system crashing down. And “yes, but needs must”.
When he was Chancellor, Kwasi Kwarteng vetoed the move. He bought the claim, said the Treasury, it was “an additional tax on banks” and would appear as though the UK was choosing not to pay interest owed merely because rates had increased. This would threaten the UK’s credibility - none of the euro area, US, Canada or Japan were doing the same.
It’s hard to see how cutting the rate applied to the QE lucre qualifies as “a tax”. As for the latter claim, it’s a fair bet that if the UK went first the others would follow.
At the risk of repetition, morally it is indefensible. That, just for once where the banks are concerned, ought to be the clincher.
