Banks’ charges ruse fuels windfall tax calls for

Calls for a windfall tax on banks grew this weekend after major lenders refused to reveal how much they are making on cash held risk-free at the Bank of England under its controversial money-printing scheme.

The stealth subsidy paid to the High Street banks costs taxpayers an estimated £20 billion a year and accounts for a significant chunk of profits which fuels bankers’ pay.

But the lenders – including Lloyds, NatWest and Barclays – won’t say how much this ruse adds to their own bottom lines.

‘It’s no surprise the banks are keeping quiet, because if people knew the true cost of this cosy arrangement there’d be uproar,’ said Reform UK deputy leader Richard Tice. The MP vowed to ‘end this scandal’ if Reform, which leads in the opinion polls, ran the country.

‘It’s simply outrageous that Britain’s biggest banks are quietly lining their pockets by the taxpayer being ripped off,’ he added.

Under the little-known scheme, which critics say amounts to free money, lenders receive interest payments on reserves – piles of cash – they have to hold at the Bank of England.

These reserves – which amount to more than £550 billion – were built up mainly as a result of the Bank of England’s Quantitative Easing (QE) programme.

Under QE, new money was conjured out of thin air to shore up the financial system following the 2008 financial crisis.

The idea was to flood the system with cash to keep interest rates low and to encourage people and firms to spend and invest, boosting the economy.

Initially the banks made virtually no money on these reserves while interest rates were low.

However, they now receive 3.75 per cent on their cash piles after the base rate soared and stayed higher for longer than expected to curb inflation, while QE was unwound.

As a result, £20 billion a year of interest payments are being channelled to the banks, inflating their profits.

It comes at the ultimate expense of the taxpayer, as the Government is liable for the Bank of England’s costs. Despite publishing hundreds of pages of data, the banks choose not to disclose the scale of their windfall. However, MPs on the Treasury Select Committee found that Lloyds, NatWest, Barclays and Santander made more than £9 billion in 2023 on their cash reserves.

Since then these returns have fallen after interest rates peaked and the amount of cash held at the Bank of England dropped.

But Lloyds, Britain’s biggest lender, still made about £2 billion in this way last year – with overall profits of £6.7 billion – according to Gary Greenwood, banking analyst at broker Shore Capital.

NatWest, which on Friday posted bumper profits of £7.7 billion, up a quarter on the previous year, is likely to have raked in a similar sum on its cash holdings. Barclays refused to give a figure but filings for its UK unit show it netted £1 billion in interest payments on its central bank reserves last year.

Chancellor Rachel Reeves resisted calls for a windfall tax in her latest Budget in November last year after strong lobbying from the banks. They argue a levy would lead to less lending, hampering growth.

Bank of England Governor Andrew Bailey also voiced his opposition to a windfall tax.

However, the proposal enjoys widespread support from across the political spectrum.

‘The Bank of England has created a bonanza for commercial bank profits, paying out high rates of interest which are slowly and only partly passed on to their customers’ savings accounts,’ said Dominic Caddick of the left-leaning New Economics Foundation think-tank. ‘While the rest of the UK feels squeezed by a cost of living crisis, it is no surprise commercial banks may try to conceal this government gravy train.’

Limiting the amount of interest-paying reserves held at the Bank of England – known as tiering – could save more than £10 billion for taxpayers, Caddick reckoned.

‘Such a system is already in practice in the Eurozone, Switzerland and Sweden,’ he added.

News of the lenders’ hidden windfall, which Reform leader Nigel Farage has described as ‘free money’, comes as the bosses of Britain’s biggest banks scoop pay packets the size of which has not been seen for a decade. Lloyds chief executive Charlie Nunn netted £7.4 million, up a fifth on the previous year, while Barclays boss CS Venkatakrishnan saw his pay rise to £15 million from £11.6 million.

NatWest’s Paul Thwaite took home £6.6 million, a third more than the previous year.

Thwaite, who returned the lender to full private ownership last year after its £45 billion taxpayer-funded bailout in 2008, admitted that he was ‘very well paid’.

‘I’m very fortunate, and it would be churlish of me to suggest otherwise,’ he said, before adding there was ‘a very close link between pay and performance’.

The Mail on Sunday’s Fat Cat Files found the average pay of a FTSE 100 chief executive was £4.7 million last year but top bank bosses are paid considerably more.

Andrew Speke, interim director of the High Pay Centre research group, said: ‘The sums being paid to these chief executives are not only significantly higher than the average FTSE 100 chief executive but also represent substantial increases over their pay from just a year ago, far exceeding inflation or wage growth in the wider economy.

‘It is hard to believe that all three have performed so exceptionally in the past year to justify such rises, yet this remains typical within a broken executive pay model.’