Why are we giving a £24bn-a-year subsidy to profitable commercial banks? | Letter
Gerald Holtham suggests that it time to cut the 3.75% that the Bank of England pays out on the lenders’ reserves There are increasing calls for a windfall tax on banks ( Taxing the banks: what Europe’s windfall levies brought in as Burnham eyes his next move, 2 September ). Such a tax is unnecessary; it would be enough simply to stop paying commercial banks a huge existing subsidy. The Bank of…
Gerald Holtham proposes reducing the 3.75% interest rate the Bank of England pays on commercial banks' reserves. Calls for a windfall tax on banks are growing, but such a tax is unnecessary; stopping the existing subsidy would suffice. The Bank holds commercial banks' reserve deposits and pays policy interest on all of them, costing taxpayers £24bn annually.
This payment exists to control banks' lending rates by setting a floor, but it could be done more efficiently by paying interest on only a portion of the reserves. The Bank could provide a tranche for each bank, with any reserve reduction counted against this tranche first. This approach maintains the same marginal cost for banks while ensuring interest-rate policy effectiveness. Implementing a 20% tranche could save over £19bn annually.
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