Banks will be among the biggest beneficiaries of Kwasi Kwarteng’s mini-budget after he announced a raft of policies to help costs, boost profits, lure staff, fuel house prices and slash red tape.
Scrapping the banker bonus cap
One of the most controversial announcements on Friday was the decision to scrap the EU banker bonus cap, which has limited payouts to two-time workers’ salaries since 2014.
The rules were meant to end a bonus culture that prioritized short-term profits over longer-term stability in the run-up to the financial crisis. But Conservative politicians, including then chancellor George Osborne, railed against the cap from the start, warning it would harm competitiveness and increase banks’ fixed costs.
The new government is taking advantage of Brexit to scrap the cap, in a move likely to be welcomed by employers who use variable pay to slash costs in slower years.
However, headhunters warn the effect will be marginal and unlikely to create more jobs or lure many high-earning bankers to the UK, given European staff tend to enjoy the reliability of salary-focused income, while US bankers are unlikely to leave New York for the same pay in London.
The decision to lift the cap perplexed some bank bosses who said they had not lobbied for the change, nor were they consulted on the proposals.
In the meantime, high-earning City bankers will still have an income tax reduction to look forward to.
Cutting stamp duty to prop up the housing market
Rising interest rates will boost banks’ net interest margins – which are a key measure of profitability and account for the difference between what is charged for loans and paid out for deposits. Lenders have been accused of being slow to pass on rate rises to savers while increasing mortgage rates for borrowers.
Liz Truss’s team’s decision to incentivize prospective homebuyers by doubling the threshold at which they start paying stamp duty to £250,000 will also prop up the housing market, which has shown signs of slowing. They have also increased that figure from £300,000 to £425,000 for first-time buyers.
Lloyds Banking Group, which owns Halifax and is the UK’s largest mortgage lender, said in July that it expected its rate of lending to grow by single digits over the next 12-18 months in light of forecasts of a soaring interest rate.
However, a cut to stamp duty is likely to push lenders’ forecasts higher when they release third-quarter results in October and increase profit expectations.
slashing red tape
The chancellor also trailed “an ambitious package of regulatory reforms” that he said would be revealed this autumn. It is unclear whether this will be in addition to the financial services bill, which will essentially challenge EU financial regulations.
Some of the biggest changes already in train involve forcing regulators to consider the “competitiveness” of firms when applying UK regulations, rather than just whether they are treating consumers fairly or holding enough capital to cushion against potential risks. That is despite economists warning it is an inappropriate throwback to pre-crisis conditions.
And despite Kwarteng stressing that he considers the independence of the Bank of England to be “sacrosanct”, the government is still planning to give itself powers “to direct a regulator to make, amend or revoke rules where there are matters of significant public interest” – a move that could also benefit the City firms lobbying for changes to UK rules.
Canceling corporation tax hikes
Kwarteng also confirmed the government would hold corporation tax at 19%, rather than raising it to 25% as originally planned by the former chancellor Rishi Sunak.
That move alone is expected to save City firms a combined bill of £4.5bn between 2023 and 2025, according to analysis compiled by the House of Commons Library.
However, Kwarteng is canceling a planned reduction in the additional bank surcharge that was meant to offset the corporation tax rise, meaning it will stay at 8%, rather than dropping to 3% next year. Smaller lenders including the Co-operative Bank will still benefit from a higher threshold, with the chancellor promising the surcharge will only apply to lenders earning at least £100m, rather than £25m.
The combined rate of tax for most banks and building societies, however, will stay at 27%.
Bills freeze to keep companies afloat
Fears of widespread corporate failures among business borrowers were growing, with companies more exposed to price fluctuations than households since they do not benefit from the UK’s energy cap.
But Truss’s decision to cut the unit price of energy for businesses for at least six months means banks will be less worried about businesses going under, shielding them from a potential sharp increase in defaults.