Banks among the biggest beneficiaries of Kwarteng’s mini budget | Mini budget 2022

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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 cut red tape.

Scrapping the bank bonus ceiling

One of the more controversial announcements on Friday was the decision to scrap the EU’s bank bonus cap, which has limited payouts to twice workers’ wages since 2014.

The rules were supposed to end a bonus culture that prioritized short-term profits over long-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 cut costs in slower years.

However, headhunters warn that the effect will be marginal and unlikely to create more jobs or lure many high-earning bankers to the UK, as European staff tend to enjoy the reliability of salary-focused income, while US bankers are unlikely to leave New York for same salary in London.

The decision to lift the cap confused some bank executives, who said they had not lobbied for the change, nor were they consulted on the proposals.

Meanwhile, high-earning City bankers will still have a tax cut to look forward to.

Cutting stamp duty to support the housing market

First-time buyers look at houses for sale in a real estate window
Lenders have been accused of being slow to pass on rate rises to savers while increasing mortgage rates for borrowers. Photo: Clynt Garnham Business/Alamy

Rising interest rates will increase banks’ net interest margins – which is a key measure of profitability and accounts 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’ team’s decision to encourage would-be home buyers by doubling the threshold at which they start paying stamp duty to £250,000 will also support 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.

Lloyd’s Banking business Group, which owns Halifax and is Britain’s biggest mortgage lender, said in July it expected its lending rate to grow in single digits over the next 12-18 months amid forecasts of a rise in interest rates.

However, a stamp duty cut is likely to push lenders’ forecasts higher when they publish third-quarter results in October and boost profit expectations.

Cutting red tape

The chancellor also pursued “an ambitious package of regulatory reforms” which he said would be unveiled this autumn. It is unclear whether this will be in addition to the Financial Services Bill, which will essentially repeal EU financial regulations.

Some of the biggest changes already underway involve forcing regulators to consider companies’ “competitiveness” when applying UK rules, rather than just whether they treat consumers fairly or have enough capital to mitigate potential risks. This is despite economists warning that it is a inappropriate return to pre-crisis conditions.

And despite Kwarteng stressing that he considers the Bank of England’s independence to be “sacred”, the government still plans to give itself powers “to direct a regulator to do, change or repeal rules where there are matters of significant public interest” – a move that could also benefit City businesses lobbying for changes to UK regulations.

Cancellation of corporation tax increases

Kwarteng also confirmed that the government would keep corporate tax at 19% instead of raising it to 25% as originally planned by former chancellor Rishi Sunak.

This move alone is expected to save City businesses a total bill of £4.5bn. between 2023 and 2025. according to analysis prepared by the Library of the House of Commons.

However, Kwarteng is canceling a planned reduction in the additional bank surcharge that was supposed to offset the rise in corporation tax, meaning it will remain at 8% instead of falling 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 making at least £100m. GBP instead of 25 million.

However, the overall tax rate for most banks and building societies will remain at 27%.

Bills freeze to keep businesses afloat

Fears of widespread corporate failure among business borrowers grew, with businesses more exposed to price fluctuations than households as they do not benefit from the UK’s energy cap.

But Truss’ decision to lower the unit price of energy for businesses for at least six months means banks will be less concerned about businesses going under, protecting them from a potential sharp rise in defaults.

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