(Bloomberg) – The Bank of England plans to raise an additional 90 million pounds ($ 120 million) a year through a new levy on banks and building societies to cover its operating costs.
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The additional income will for the first time bring the total annual funding provided to the central bank by financial institutions above £ 500 million. The BOE is reviewing its financing terms after struggling to balance and drawing on its capital reserves during fiscal year 2020/21.
The cost of its economic and financial stability operations is covered by a special charge on financial companies which has encountered problems recently because the model links revenues to the government’s long-term borrowing costs, which collapsed during the pandemic.
This year, for what the BOE described as “the first time in available records,” the 326-year-old institution failed to pay a dividend to the Treasury after its capital fell below a legal threshold . Although the dividend is small, at around £ 50million, the BOE views financial independence as essential for political independence.
Outlining plans for a new levy in a consultation paper released in September, the BOE said the current arrangements “prevent the bank from performing its functions in pursuing its statutory monetary policy and financial objectives. financial stability “.
He added: “Whatever mechanism is used to generate the revenue, payers will face a greater burden than expected… as the costs of the Bank’s political functions are now higher than expected. “
Part of the increase in costs is linked to the pandemic. The BOE also faced additional technology expenses. Treasury officials worked with the central bank to design the new mechanism. If the BOE does not finance itself, the Treasury will have to make up for the shortfall.
In the documents, the BOE models a levy of 220 million pounds, 90 million pounds more than last fiscal year. About four-fifths of the costs are covered by the 20 largest institutions, the BOE said. UK and foreign banks are subject to fees.
The tax will be in addition to an existing charge of £ 300million to cover the cost of the BOE’s regulatory wing, the Prudential Regulation Authority. The combined charges effectively add to the UK financial sector’s tax bill. In fiscal year 2019-2020, banks paid £ 9.5 billion in corporate tax and direct debit.
Currently, the BOE’s monetary operations are funded through the ‘cash-to-cash ratio deposit scheme’, under which commercial banks are required to place interest-free deposits with the BOE, which it invests – usually in gilts – to fund political office. This year, the arrangement raised 130 million pounds.
Consultation with the 159 institutions that would share the costs ended on November 5 and the Treasury is expected to announce the levy in the new year. The decision has not yet been finalized and the BOE could revert to a strengthened version of the existing CRD scheme. In any case, he will need additional income.
Commercial banks have already backed plans to replace the complex CRD system with a simpler annual levy, according to the consultation documents. But the arrangement means the BOE is more beholden to the Treasury, which must approve the levy each year. The previous arrangement froze funding for five years.
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