BOE Plans £90 Million Charge on Banks to Cover Running Costs

(Bloomberg) -- The Bank of England plans to raise an extra 90 million pounds ($120 million) a year from a new levy on banks and building societies to cover its running costs. 

The additional income will lift the total annual funding provided to the central bank by financial institutions above 500 million pounds for the first time. The BOE is overhauling its funding arrangements after struggling to break even and drawing on capital reserves in the 2020/21 financial year. 

The cost of its economics and financial stability operations are met by a special charge on financial firms that has run into trouble recently because the model ties income to long-term government 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 about 50 million pounds, the BOE views financial independence as critical for policy independence.

Outlining the plans for a new levy in a consultation paper published in September, the BOE said the current arrangements “inhibit the Bank from discharging its functions in pursuit of its statutory objectives in respect of monetary policy and financial stability.”

It added: “Regardless of the mechanism used to generate the income, payers will face an increased burden than assumed … as the costs of the Bank’s policy functions are now higher than forecast.” 

Part of the increase in costs is related to the pandemic. The BOE has also faced extra technology expenses. Treasury officials have worked with the central bank to design the new mechanism. If the BOE is not self-funding, the Treasury will have to make up the shortfall.

Funding Model

In the documents, the BOE models a levy of 220 million pounds, 90 million pounds more than the latest financial year. Roughly four fifths of the cost is covered by the largest 20 institutions, the BOE said. Both U.K. and overseas banks are subject to the charge.

The levy will be on top of an existing 300 million pound charge to cover the cost of the BOE’s regulatory wing, the Prudential Regulation Authority. The combined charges effectively add to the U.K. financial sector’s tax bill. In the 2019-20 financial year, banks paid 9.5 billion pounds in corporation tax and the bank levy.

Currently, the BOE’s monetary operations are funded by the “cash ratio deposit scheme,” under which commercial banks have to place interest free deposits at the BOE, which it invests -– usually in gilts -– to fund policy functions. This year, the arrangement raised 130 million pounds.

Consultation with the 159 institutions that would share the cost closed on Nov. 5 and the Treasury is expected to announce the levy in the New Year. The decision has not yet been finalised and the BOE could revert to a beefed up version of the existing CRD scheme. Either way it will need extra income. 

Commercial banks have previously supported plans to replace the complex CRD scheme with a simpler annual levy, the consultation documents said. But the arrangement will mean the BOE is more beholden to the Treasury, which must approve the levy annually. The previous arrangement locked funding in for five years.

©2021 Bloomberg L.P.