Why are we giving a £24bn-a-year subsidy to profitable commercial banks? | Letter

Gerald Holtham suggests that it time to cut the 3.75% that the Bank of England pays out on the lenders’ reserves There are increasing calls for a windfall tax on banks ( Taxing the banks: what Europe’s windfall levies brought in as Burnham eyes his next move, 2 September ).

Such a tax is unnecessary; it would be enough simply to stop paying commercial banks a huge existing subsidy.

The Bank of England holds the reserve deposits of the commercial banks and pays its policy interest rate on the entirety of those reserves.

Paying 3.75% on about £640bn means handing over £24bn a year of public money to profitable commercial concerns.

The Bank does so only to control the banks’ lending rates by establishing a floor.

Yet that could be done more economically by paying interest on a marginal slice of the reserves.

The Bank could announce a tranche for each bank and declare that any reduction in reserves from that level is counted as coming firstly from the interest-bearing tranche.

That keeps the same marginal opportunity cost to the banks and ensures interest-rate policy is effective.

If the tranche were 20%, there would be a gross saving of more than £19bn a year.

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