The Financial Mail has reported that:
It is understood that the Treasury is weighing up a number of options to tap banks for cash. These include scrapping the interest which the Bank of England pays on some deposits held by lenders – mainly high street banks including Lloyds, NatWest and HSBC.
The amount of commercial bank reserves held at the Bank of England has soared in recent years because of its policy of quantitative easing – or electronic money printing. This involved the central bank buying government IOUs – known as gilts – from financial institutions and creating an equal amount of deposits held by commercial lenders at the Bank.
Initially this yielded little income for the banks as interest rates were at rock-bottom. But this year – as the Bank of England hiked base rates in an attempt to curb inflation – banks have enjoyed an interest rate bonanza on these deposits. Cash balances at the Bank of England currently earn the base rate of 2.25 per cent, but traders are betting that the official cost of borrowing will hit 5 per cent by early next year.
They added:
One idea under consideration is 'tiering' – where interest would no longer be paid on a set amount of cash balances.
If true, this is wholly appropriate, and something I have argued for over a long time. It is also much more useful than a windfall tax: taking 100% of the income away at source is bound to be better than that.
How much is involved? It could be up to £45 billion a year at current levels of central bank reserve account. That makes a real difference.
At long last, I have found something Kwarteng might do right.
But, of course, it was in the Mail, so let's not rely on it.
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Who knows?
Maybe wiser (and more frightened) heads in the Tory party have got through?
Maybe some of his Treasury advisors have read your pieces arguing for this?
If the govt are indeed looking at it they seem well ahead of Labour – who are absolutely terrified of thinking out of their self imposed box. But it Kwarteng does it – Labour at least might shuffle into line and admit they could.
Even if it happens – there is still a long way to go to replace the standard narrative – that there are no sources of money to spend on services than just ‘more taxes’
I am aware that this blog is read in the Treasury – because I am told so by some there
You also referred us, Richard, to the NEF paper on the idea of tiering interest rates on commercial bank reserve accounts held at the BOE; (Van Lerven and Caddick: Between a Rock and a Hard Place; NEF June 22). This is an informed and interesting document with policy options….one wonders if the Treasury saw it.
It is so disappointing that the media generally will not pay attention to the substantive engagement and practical policy work which goes on. The Labour Party too is missing a trick. Apart from you, Richard, and the FT, I saw no reference to this elsewhere. But the enthusiasm of the BBC (in particular) for the class war based economic assertions coming from right wing Tufton Street think tanks knows no bounds.
FT and Bloomberg reporting Kwarteng’s choice of an ‘outsider’ to head the civil service Treasury team to replace Tom Scholar has been abandoned over the weekend. O Romeo, Romeo wherefore art thou Romeo?
Too cheesy, too obvious; but somehow, so farcically obvious, it fits the bill perfectly for thischeesy farce of a Government.
Interesting but two thoughts.
First, will this become a BoE/HMT clash? Currently, the BoE sets policy rates and chooses what rate to pay on excess reserves; they might not take kindly to this intervention that will work directly against their policy of raising rates.
Second, the devil is in the detail. How do you stop paying interest to banks yet still transmit the desired policy rates to the real economy. Yes, there are ways to do this… but I would like to see the precise mechanisms selected.
Glad to hear that HMT do read the blog.
Is more than £200 billion of reserves needed to convey those rates?
Serious question…
I don’t know. £200bn might be correct but…
Will a particular level of unremunerated reserves be decided for each bank? On what basis? How will it be changed as their business/markets change? What could these unremunerated reserves be used for? My point is that such a change in policy requires quite a lot of thought and planning and co-ordination between BoE and HMT.
Actually, I think it offers another lever to monetary policy that could be valuable. For example, “good” lending could be rewarded and unproductive lending penalised in a reserve requirement regime.
In any case, it would be pretty easy to make a start and say to each bank that “20% of your average reserve holdings over the last year will now be ‘required’ reserves and not receive interest; they would, however, count as liquid assets under LCR rules etc.”. Then just see how it goes… and tweak/ramp up as banking system gets used to it.
Let me muse on that….
“For example, ‘good’ lending could be rewarded and unproductive lending penalised in a reserve requirement regime.”
That is really intriguing. How would ‘good’ lending be determined? Counterintuitvely, by focusing on ‘bad’ lending? The trends in bad debts? “Unproductive” lending; what do you have in mind? A measure of ‘risk’ in their balance sheets? How?
As I said, this needs to be thought about – but given the scheme capitalists banks that thinking is essential now
@John S Warren
Surely good lending is any lending for productive purposes – woefully small from the big banks currently. Bad lending would be any lending for speculation or investing in existing assets. That would of course include housing which might help to stop bank lending pushing up housing prices – in normal times at least..
This is why much of this needs to be treated as capital available for social use…
Mr May,
I appreciate your intent; but might an old-fashioned banker look at good lending as best defined as well secured or low risk lending? This does not mean that “productive purpose” lending is necessarily high risk; more often than not the opposite will be the case – high risk lending will be speculative); but I hestitate to assume low risk and ‘productive purpose’ are effectively the same thing. The productive purpose may be badly founded, however well intentioned or – however meritorious – risky. I have always believed we will only crack the viavility of tidal energy conundrum through the R&D risk being carried in the early stages by Government (public sector), because the private sector will not invest the scale of capital required, given the risk profile of the cutting-edge technology and engineering problems in an adverse envronment.
An even better requirement, Richard
@John S Warren
So we are agreeing that a ‘sensible’ state must lead the way…
It has always seemed to me that there are some things that can only be done by Government. If, for example key supplies like electricity or railways depends on a single line (or cable or pipeline) carrying the supply, or source of production ‘competition’ is always going to be an artificial creation, an illusion. Furthermore, the entry costs for some of these critical services are either prohibitive for private sector investment, or raise critical issues of sovereign supply security. For example, Hinkley Point estimated cost £26Bn, and counting; in what way is investment in its operation the function of market competition – when only government can realistically contemplate such a decision? The idea that free market competition (in practice a condition only functional between quite narrow limits of survivability in the real world – and often requires protection, in one form or another, however big you are; even the PRC carefully manages and protects its international industrial power by tying the renminbi to the US$; it does not float, but is pegged).
There is so much hot air inflating neoliberalism.
True
Another example is Euro-Tunnel.
How many times has ET been back to the banks to renegotiate its loans because Margaret Hilda Thatcher insisted that the private sector paid for the project?
Big infrastructure projects should be left to the state – not used as revenue streams for banks.