Chancellor George Osborne has clamped down on the UK banking sector with a new tax on profits.
The levy will raise £2bn a year in the form of a tax on banks in proportion to the size of their balance sheets. Smaller banks will be exempt from the move, which will come in in January 2011. The UK operations of foreign banks will be liable for the new levy.
The safest Tier 1 capital is exempt, essentially meaning the levy is a tax on banks' risk assets.
Osborne says: "This was a crisis that started in the banking sector, with huge costs to the rest of society. The banks should make a contribution proportional to their level of risk."
Both France and Germany are set to announce similar taxes, Osborne adds.
The move was widely expected, as both the Liberal Democrats and the Conservatives had proposed such a tax on banks in their pre-election manifestos. The Lib Dems had proposed to claw back £2bn through the tax on banks in the first year, and £3bn in the second year, while the Tories were aiming for a £1bn through taxing banks in proportion to the assets on their balance sheets.
The British Bankers' Association (BBA) has previously criticised the plans, arguing a tax on the City would stifle the UK financial sector's competitive edge.
Commenting on the Budget speech, the BBA says it understands the part banks must play in the economic recovery, but warned the Chancellor must be careful the tax does not hit commerce too severely.
The BBA says: "The UK is a trading nation and we must ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here. This levy is to apply to all major banks and building societies operating in the UK regardless of nationality.
"The industry does business globally but pays its taxes in Britain. The UK is not the only country creating some form of bank levy. So bank levies need to be co-ordinated internationally: they must not prevent the industry in the UK from being able to compete. It is essential that the international banks do not find themselves taxed multiple times for the same thing."
Earlier this week Angela Knight, the chief executive of the BBA, said the industry welcomed the Chancellor's move to strengthen banking regulation, but expressed concerns about the possible breakup of the banks.
"Breaking banks up here would quickly be felt by individuals and companies who would pay more for their mortgages and finance," she says. "The major changes that the big banks have already made have reduced the risks but more can be done, and is being done, to bring security in this way through regulation."
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