How annoying it is to see the major banks post eye-watering profits, plus offensive salary raises for their top bods, when we, the taxpayers, are struggling to make ends meet?
That’s how I felt I saw the profits posted for HSBC, Citibank, Lloyds et al this week.
Lloyds, Britain’s largest domestic banking group, owning Lloyds Bank, Halifax, Royal Bank of Scotland and Scottish Widows, posted a pretax profit of £7.5bn for 2023, up 57 per cent from £4.8bn in 2022 – an all-time high for them.
Then HSBC reported a pretax profit of $30.3bn (£24.bn) for last year, soaring by 78 percent from 2022.
Citibank’s parent company Citigroup announced that its Scottish chief, Jane Fraser, would get a pay rise to £20.6m a year while slashing 20,000 jobs. And they wonder why we don’t like the banking sector!
These huge figures are a major irritant to most ordinary people – even those on a comfortable income – who are currently finding it much harder to pay their way than they used to. It’s particularly galling to see the banks effectively profiting from our misery.
Much of the reason why the banks have raked in the cash in the last year is because of the higher cost of borrowing which has been good news for them, while creating yet more financial burden for customers.
However, we have to remember that banks are businesses and they need to make a profit like any other business. As they are publicly listed companies, their profits also help shareholders. As anyone who has money in a pension fund is likely to be invested in the stock market, the knock on effect for most is that these profits are helpful to them, at least to some degree.
Is it time for windfall taxes?
There have been calls to impose windfall taxes on banks because of these high profits but I think that would be a false move…however satisfying it might feel for a while. Placing a tax on high profits on any business is like punishing them for doing well. That is not a good precedent to set.
Windfall taxes are supposed to be levied on companies that have benefited from something they were not responsible for, in conditions they did not create.
But you could argue that many businesses get lucky here and there when conditions are particularly favourable to what they do. At other times those conditions might be the complete opposite and they could lose a lot of money through no fault of their own.
Personally I’m not in favour of windfall taxes on companies or ‘super taxes’ on individuals who make a lot of money, as it disincentivises people and businesses to make money. That doesn’t help anyone. Not only that, but as it gets easier and easier to move country, punitive taxes could encourage more businesses to relocate to a different part of the globe, taking their jobs and profits with them.
Bank taxes already exist
Currently the UK imposes a bank levy which it introduced in 2011 in response to the 2008 financial crisis. This applies to the balance sheet assets of UK banks as well as assets belonging to the British operations of foreign banks. It’s a kind of constant tax and, the better they do, the more they pay anyway.
Windfall taxes on bank profits are not generally imposed across Europe. Italy imposed some last year and Spain are threatening to do so, but France, Germany and Sweden don’t (although Sweden has a ‘risk tax’ based on banks’ liabilities).
It’s possible that if Labour becomes the ruling party in the UK – as seems likely – that they will impose windfall taxes on banks. They have already threatened to do so to the utilities companies that also did very well out of our misery in the last few years. It is a socialist principle to take money from the rich, whether they be individuals or companies, but it is a difficult rule to put into practice safely.
No bail-outs
Personally I am not in favour of windfall taxes, but I am in favour of treating businesses like businesses. That means that they should be allowed to make profits while taking all the risks of running a money-making operation. Risk and reward are inextricably linked in investing and in business.
Ultimately, banks are businesses. They exist to make a profit and, although they are supposed to serve us, their customers, their main priority really is profit.
Even though for years we saw our high street banks as something akin to the NHS – semi-governmental and certainly part of the establishment that is there to support and protect us – the financial crash of 2008 showed us in living colour just how very much they are businesses that are there to make a profit first, pay its shareholders second and serve us the customers third.
In 2008 we, the taxpayers, bailed out the banks. At the time I thought that was the right thing to do. Now, though, with hindsight I think we should have let more fail. Certainly now that we have the Financial Services Compensation Scheme (FSCS) which covers bank customers’ savings up to £85,000 per person, banks most definitely should be allowed to fail. Customers would be able to get their money back but the business itself would go under.
Let them fail but let them keep their profits. That’s the business way and everyone needs to accept that fact.
