By Jason Karaian, Financial Services Industry Analyst at the Economist Intelligence Unit.
When Britain's government introduced a banking levy, it was pitched as a measure to "encourage banks to move to less risky funding profiles". To this end, a bank faced a steeper rate if it relied on short-term wholesale sources of funds instead of more stable, long-term options.
Now, the levy is discussed as a way to ensure that banks make "a fair contribution" to the economy. It is an important difference. After a host of factors, including the levy, motivated banks to scale back on flightier sources of funds, the Exchequer found that its levy will not raise the projected amount. Instead of acknowledging that the measure may have played a part in changing banks' behaviour, the government hiked the levy rate in order to raise the desired amount.
Today, the Treasury made it clear that it wants to raise 2.5bn from banks every year. There is little banks can do to avoid contributing their "fair" share to this target. Thus, the levy is now purely a revenue-raising exercise instead of an incentive to alter banks' conduct.
It seems that government will leave it to other national, regional and global reforms to address making the country's financial system safer. When it comes to the banking levy, the idea is simply to extract cash from a politically expedient target.