LONDON (ShareCast) - (Sharecast News) - Shares in UK banks fell on Friday after an influential think tank called for a windfall tax on the sector to bolster public finances.
The Institute for Public Policy Research (IPPR) said the Bank of England should stop bond sales to stem £22bn-a-year losses from quantative easing (QE) as it winds the programme down.

IPPR director and for er Bank of England economist Carsten Jung said the UK taxpayer is spending billions every year "compensating the Bank of England for losses on its QE programme, public money which is partly being funneled to commercial bank shareholders".

"This subsidy of commercial banks, at the expense of public services, is boosting bank profits while millions face the cost-of-living crisis. Since interest rates began rising in December 2021, the four largest UK banks have seen their annual profits more than double ... some of this is a direct transfer of funds from the taxpayer to shareholders," he said.

The emergency policy, first introduced in 2009 when the banking industry itself caused the global financial crisis, saw the government buy £895bn of bonds held by UK banks crediting them with reserves at the BoE in exchange.

With the central bank now winding down its easing programme taxpayers are bearing the brunt as the £100bn-a-year sales are occurring at a loss.

Under the current set-up, the Treasury pays the BoE for both interest rate losses and the drop in value of bonds bought during QE. These payments ultimately benefit commercial banks, and other financial institutions, which hold hundreds of billions of pounds of QE-related reserves, Jung said, making the UK "an international outlier in having its Treasury pay for its central banks losses".

He said the Treasury should introduce a QE reserves income levy on commercial banks, in a similar vein to former Conservative Prime Minister Margaret Thatcher's 1981 deposit tax on banks, to save £7-8bn a year over this parliament and the BoE slows down quantitative tightening (QT), by ending the Bank of England's "fire sale" of government bonds to save more than £12bn a year

"These two policies could save the taxpayer more than £100bn over the course of this parliament giving the government much needed fiscal headroom and allowing them to support households."

"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. While families struggle with rising costs, the government is effectively writing multi-billion-pound cheques to bank shareholders."

"This is not how QE was meant to work - and no other major economy does it this way. 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."

Reporting by Frank Prenesti for Sharecast.com

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