In his annual budget presentation, Chancellor of the Exchequer Alistair Darling revealed further measures to force the hand of Britain's banks and bankers
Britain's banks were told that it is payback time as a series of measures were unveiled designed to force them to support the economic recovery and tackle financial exclusion.
Alistair Darling also said that £2bn had been raised through the 50 per cent one off "super tax" on bankers' bonuses over £25,000 – nearly four times his original forecast of £550m. The windfall will largely be spent on further measures to stimulate the economy and extra university places.
Mr Darling also again signalled Britain's support for an international "risk tax" on banking transactions to build funds to prevent future government bailouts – but said Britain would not go it alone, as suggested by the Conservatives. He argued that doing this could put "thousands of jobs at risk, not just in London but across the country."
The Government pumped an estimated £1.2 trillion into the banking system to stave off a threatened meltdown at the height of the financial crisis. Measures taken include the nationalisation of Northern Rock and Bradford & Bingley's mortgage business with big stakes taken in Royal Bank of Scotland (RBS) and Lloyds Banking Group (LYG). Even banks which did not take direct state aid – such as Barclays (BCS) and HSBC (HBC) – have benefited from government actions such as the special liquidity scheme and economic stimulus measures.
But in his Budget speech, Mr Darling said: "We will sell our shares in RBS and Lloyds as well as Northern Rock in a way that maximises value for the taxpayer and recoups the money we invested. We intend to get all the taxpayer's money back. The Treasury has already received £8bn in fees and charges in return for support."
He said "unbanked" Britons will also be given a new right to open no-frills "basic" bank accounts while banks could be forced to provide money to improve the availability of affordable credit to poorer families through a "community levy."
Royal Bank of Scotland and Lloyds have also been told to lend £105bn to homebuyers and businesses over the next year, of which £41bn must be lent to small businesses. If they fail to meet the targets, the executives responsible could have their bonuses docked. The Government said UK Financial Investments, which manages the taxpayer's holdings in banks, would "work with" banks' remuneration committees to penalise responsible directors.
However, the business target is a gross lending figure rather than a net figure, and the two companies said it was close to what they lent last year anyway.
Mr Darling further said he would consult on measures to give shareholders more power over executive pay at banks, and further review their pay policies to assess whether they are detrimental to consumers and the economy.
"There can be no return to business as usual for the banks," Mr Darling said. However, he added: "Their success is vital. London is the world's leading financial centre."
After the Chancellor finished speaking, Northern Rock said its "bad" bank – Northern Rock's asset management – would be merged with Bradford & Bingley's taxpayer-owned mortgage books to create a single company.
Reacting to the measures, Angela Knight, chief executive of the British Bankers' Association, said: "This was a Budget with an eye on the ballot box. As the Chancellor knows, the UK's banking sector still generates a sizeable proportion of what he has available to spend, and the banks are committed to continuing to do so. They are also committed to repaying the taxpayer support in full and have already paid more than £8bn.
"Revenue from banks will support many of the Chancellor's initiatives – this shows clearly the value of the financial services industry to the UK. The banks welcome moves to sustain the economic recovery and restore confidence, particularly as they focus their efforts on supporting mortgage borrowers and small businesses."
Mrs Knight said banks already contribute £24bn annually in tax, both through direct corporation tax from firms plus income tax from their employees.
She added: "Unlike in America, the taxpayer intervention in the UK will be paid back and more so. Ahead are many changes which will add to the operational costs of all banks and so to the cost of borrowing. We know only too well that taxing the banks will bring short-term popularity but the question that the Treasury is failing to answer is what all their additional rules and now this tax will mean for the price that people and businesses will pay for their loans and their mortgages."
On the subject of basic bank accounts, she insisted that anyone who wants a bank account is already able to get one.
Small businesses: Lenders to be policed
Small businesses denied credit by their banks will be able to appeal to a new credit adjudicator with powers to force banks to lend.
The new adjudicator is being created amid continuing rows between business groups and banks over the availability of credit to small firms.
Both the Institute of Directors and the Federation of Small Businesses have hit out at banks' claims that they want to lend, saying terms are frequently punitive.
They have dismissed claims by the main banks that they are doing all they can to lend cash to "creditworthy businesses" but have been unable to hit targets because firms have been paying loans back.
Alistair Darling, the Chancellor, said the adjudicator would work closely with an enhanced Business Link Financial Intermediary Service "to ensure that SMEs are treated fairly."
However, banks have taken a dim view. Angela Knight, the chief executive of the British Bankers' Association, said: "Banks extend credit to small businesses in 85 per cent of cases, and are ready and willing to lend to all businesses with a sound business plan. We have very little detail about this proposed adjudicator, but we believe banks' scrutiny and decision-making processes are robust. Any new authority should very quickly find this to be the case."