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UNCLAS SECTION 01 OF 03 LONDON 000260 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON ETRD EINV UK
SUBJECT: HMG SAYS UK WILL NOT INTRODUCE BANK LEVY TO RECOUP BAILOUT 
COSTS NOR FORMALLY SEPARATE BANKS 
 
LONDON 00000260  001.3 OF 003 
 
 
¶1.  (SBU) Summary:  Following President Obama's proposals for a 
Financial Crisis Responsibility (FCR) fee and bank restructuring, 
HMG announced it would not introduce similar measures in the UK. 
While HMG supports the concept of a future internationally 
coordinated global bank insurance levy, it does not anticipate the 
need for such a levy to recoup bail-out costs.  HMT anticipates 
making a positive return for the taxpayer in recouping bail-out 
costs in the UK by selling its bank shareholdings "when the time is 
right."  HMG would not emulate the U.S. "scope and scale" proposals 
by barring banks from proprietary trading and ownership of hedge and 
private equity funds, nor cap their size, but would seek to control 
risky bank behavior through enhanced capital requirements and more 
effective regulation.  In contrast, both the Conservative and 
Liberal Democrat parties quickly announced their support for a 
permanent, worldwide version of the FCR and both welcomed U.S. scope 
and scale proposals - contingent on an international agreement. 
Financial services industry officials widely acknowledged the 
appropriateness of a bank levy in the U.S. to recoup costs, but 
argued that institutions that had not accessed or benefited from 
TARP should be charged at a reduced rate.  They argued against the 
introduction of the scope and scale proposals in the UK.  End 
Summary. 
 
HMG: No Need for Bank Levy or U.S. Style Restructuring 
--------------------------- -------------------------- 
 
¶2.  (SBU) The UK is not considering adopting a levy on banks to 
repay taxpayers for the bank bailouts.  In a newspaper interview 
January 16, Chancellor Darling said the British government had 
organized its bank rescue differently than the U.S. by buying 
shareholdings and implementing credit guarantees, rather than buying 
the banks' toxic debts.  As such, rather than recover this money 
through a bank levy, HMG expected to turn a profit by selling its 
bank shares - in Northern Rock, Royal Bank of Scotland, and HBOS - 
"when the time is right."  HMG's response to the U.S. bank levy was 
muddied when media commentators reported on January 18 that Lord 
Myners, Financial Services Secretary, had suggested there could be a 
UK-wide levy on banks.  The Prime Minister's spokesman quickly 
clarified that Lord Myners had said he was convening a meeting on 
January 25 to look at the "very broad principles" of systemic 
resolution funds.  The spokesman said a U.S.-style bank levy to 
recoup bailout costs was unnecessary because the UK had a different 
pay-back option, through the sale of shares.  However, he noted that 
the Prime Minister had been the first to bring up the possibility of 
a global transactions tax and separately, an insurance levy, and 
that the G20 had referred these options to the IMF for review.  HMT 
Managing Director for International and Finance Michael Ellam 
reiterated this point to EMIN.  Ellam said HMT supported the concept 
of a future global bank insurance levy.  He would have liked to see 
the U.S. coordinate more closely with international partners on the 
fee, but acknowledged that tax policy is a sovereign prerogative. 
 
¶3.  (U) HMG does not support U.S. proposals to cap the size and 
trading activities of banks.  In a January 28 interview prior to his 
trip to Davos for the World Economic Forum, Chancellor Darling said: 
"I have always thought to separate banks doesn't deal with the full 
problem...It is the connections between institutions that cause 
problems, not the legal entity.  The large bank/small bank division 
- experience shows - does not answer the question of Lehmans."  He 
added that greater global coordination is needed to avoid regulatory 
arbitrage and concluded: "The Americans want radical reform, I want 
radical reform.  The key though is that we move from that discussion 
to implementation of something that is effective and we do it 
without delay."  Financial Services Secretary Lord Myners said the 
U.S. proposals responded to the "idiosyncratic problems" in the U.S. 
banking system which centered on investment banking.  In the UK, he 
argued, proprietary trading, hedge funds, and private equity were 
not at the heart of difficulties in Northern Rock, the Royal Bank of 
Scotland or HBOS. 
 
¶4.  (U) While HMG was dismissing introduction of similar proposals 
in the UK, Bank of England Governor Mervyn King reiterated his 
support for separating retail banks from investment banks.  (Note: 
King had called for Glass-Steagall-type legislation in the UK 
throughout the financial crisis as a way to prevent moral hazard.) 
Appearing before the House of Commons' Treasury Select Committee on 
January 26, King said: "Banks who think they can do everything for 
everyone all over the world are a recipe for concentrating risk." 
Instead, he argued, the banking sector should be made up of more, 
smaller participants that specialize in different activities. 
Further, he argued, international lenders should be carved up into 
national subsidiaries each with its own reserves to build firewalls 
across the banking system and stop massive losses spreading. 
 
 
Opposition: Want Insurance Fee, Restructuring Plans - But Must be 
Global 
 
LONDON 00000260  002.3 OF 003 
 
 
---------------------------- ----------------------------- 
 
¶5.  (U) Shadow Chancellor George Osborne said a Conservative 
government would welcome the introduction of a permanent, worldwide 
version of the U.S. Financial Crisis Responsibility fee.  He said a 
Tory administration would support a bank levy to protect taxpayers 
from the costs of a future crisis as long as it was agreed by G20 
countries.  His comments were echoed by Mark Hoban, Shadow Financial 
Secretary, during a January 20 conference hosted by the Institute 
for Public Policy Research (IPPR).  Hoban caveated that a financial 
levy would only work if it was coordinated at a global level.  An 
international agreement would be needed, he reiterated, saying the 
UK could not move forward with this idea on a unilateral basis. 
 
¶6.  (U) George Osborne showed similar support for U.S. bank 
restructuring proposals.  In an interview on BBC radio January 22, 
Osborne said: "By saying what he has said, President Obama is 
creating a lot of space for the rest of the world to come up with 
new systems of regulation" and added that Tories were in favor of 
"Obama-style regulation of the structure of banks."  He said, 
however, that Conservative support was contingent on getting an 
international agreement on restructuring.  In Davos on January 28, 
Osborne clarified the Conservative position further.  He said while 
the Tories favored scope and scale proposals, they would not back 
strict Glass-Steagall-type separation of retail from investment 
banks.  They understand the need of most universal banks to offer 
their customers investment banking services.  They would seek to 
prevent banks from engaging in the riskiest activities through 
tighter regulation. 
 
¶7.  (U) The Conservative Party highlighted HMG's lack of support for 
U.S. proposals during Prime Minister's Questions in the House of 
Commons on January 27.  William Hague, the Tory Shadow Foreign 
Secretary who was standing in for party leader David Cameron, asked 
Harriet Harman (standing in for the Prime Minister) why the 
government had not supported President Obama's proposals 
enthusiastically and was not working with him to realize them.  He 
further pushed Harman on HMG's lack of support for the U.S. levy. 
He said there is a clear case for a levy to compensate taxpayers for 
what happened in the past and what may happen in the future.  He 
added that it is time to work with the President on agreeing the 
proposed levy, while dropping the idea of a Tobin tax on 
transactions, which, he argued, had been rejected throughout the 
world and had been ridiculed by Governor Mervyn King.  Harman 
responded by stressing the importance of coordinating action 
internationally and said the UK is working closely with the 
President.  She noted, however, that the U.S. has different 
structures and different problems in its banking system. 
 
¶8.  (U) The Liberal Democrats supported the U.S. bank levy proposal, 
saying the U.S. had "grasped the scale of the problem."  Vince 
Cable, the Liberal Democrats' Treasury spokesman, said if banks 
continued to rely on taxpayer guarantees, they should pay for it. 
In comparison, he criticized Labour's tax on bonuses for failing to 
change the "irresponsible practices which did so much to get us into 
this mess."  Cable, who has consistently called for the introduction 
of Glass-Steagall-type legislation, praised the President's 
proposals.  In a speech January 25 to think-tank Demos, Cable said: 
"Now that President Obama has taken on the issue of breaking up the 
banks on his side of the pond, it is time we do the same in the UK. 
I see, at present, no evidence that the government or the 
Conservatives have any vision of banking beyond the immediate 
crisis." 
 
Industry Response: U.S. Levy Has "Intellectual Credibility" 
-------------------------- -------------------------------- 
 
¶9.  (SBU) The British Bankers' Association (BBA) understands that 
the levy provides a means by which the U.S. taxpayer can reclaim 
money lost through the bank bail-out.  However, Paul Chisnall, 
Executive Director of Financial Policy at the BBA, told us he sees 
no need for equivalent action in the UK because bank intervention 
here was on a different basis.  On the U.S. levy, Chisnall said he 
sees a case for introducing a reduced premium for foreign banks in 
the U.S. not given direct access to the TARP (such as HSBC, Barclays 
and RBS).  On U.S. proposals to restructure banks, Chisnall told us 
that the BBA very much supported Lord Myners' view that problems in 
the UK banking system differ from those in the U.S., and so require 
different responses. 
 
¶10.  (SBU) Europe has the universal banking model embedded in its 
history and is unlikely to adopt plans to split banks, according to 
bankers at an Embassy-organized bank roundtable January 22.  The 
bankers told us the UK needs to take particular care about adopting 
banking reform measures without adequate consultation with industry 
because of its heavy reliance on financial services, which account 
for approximately 8 percent of GDP and 14 percent of tax revenue. 
 
LONDON 00000260  003.3 OF 003 
 
 
They argued that HM Treasury is arrogant to assume businesses will 
stay in the UK if overly restrictive reforms are adopted, because it 
is so easy to book their business elsewhere. 
 
¶11.  (SBU) UK based analysts expect three UK banks to be impacted by 
the fee.  Joseph Dickerson, an analyst at brokerage firm Execution, 
expects HSBC to owe $3.8 billion over ten years, Barclays $5.6 
billion and RBS $1 billion.  A contact at RBS told us that the 
proposed U.S. levy is not a bad thing; indeed, it is the best 
proposal yet.  He said the levy is more coherent than any other 
proposals brought forward and has "intellectual credibility."  The 
UK bonus tax, by comparison, is a tax on individuals and 
institutions the government has singled out for political gain.  A 
senior official at the Confederation of British Industry echoed 
these comments. 
 
UK Academics: Fee is Good, but Could Be Even Better 
---------------------------- ---------------------- 
 
¶12.  (U) During a January 20 conference, Professor Charles Goodhart 
from the London School of Economics supported the fee as superior to 
the UK bonus tax, but said the U.S. levy could be improved if it was 
related to the maturity of a firm's debt.  He argued that firms with 
large amounts of short term debt should be charged higher fee rates, 
because of the inherent riskiness, while firms holding long-term 
debt should be charged at lower rates.  In this way, he argued, the 
fee could improve the way banks function. 
 
¶13.  (U) Other UK-based academics have been more critical.  Keith 
Young, a professor at the London School of Economics, said neither 
the U.S. levy, nor the UK bonus tax, would lead to wider reform of 
the financial system.  He said it is inevitable that many banks and 
their associations won't like the levy, but ultimately it is a very 
minor measure to recoup funds, not an ambitious plan for reform. 
Professor Keith Pilbeam at City University praised the plan for 
spreading payments over 10 to 12 years but said it failed to address 
the central issue.  He said the market failure is banking pay, shown 
this year when share prices are down but pay and bonuses are still 
high.  He said something more needs to be done to address this 
failure, perhaps even pay caps through legislation. 
 
¶14.  (SBU) Comment:  UK responses to U.S. banking proposals have 
been mixed.  However, one strain of criticism was particularly 
pronounced at the outset - that the U.S. should not have proceeded 
unilaterally, outside of the G20.  This critique has been tempered 
over the past week by prominent expressions of support for the U.S. 
initiatives, which acknowledge that the proposals are furthering the 
debate on financial regulation in the aftermath of the crisis. 
 
SUSMAN