The banking levy is lower than it looks; pay will fall regardless

For anyone upset about the impact of the proposed banking levy on the UK financial services industry, analysts at KBW have some conciliatory news: net of the reduction in corporation tax, its effect will be negligible.

Remember that last year's bonus tax raised 2.5bn. Net of the reduction in corporation tax, KBW's analysts expect the levy to raise just 1bn.

Bank by bank, they expect the impact of the tax changes to be as follows:

RBS: 2013 net profit reduced by 6% by the levy; 2013 net profit reduced by 3% when reduced corporation tax also taken into consideration.

Barclays: 2013 net profit reduced by 7% by the levy; 2013 net profit reduced by 3% when reduced corporation tax also taken into consideration.

Lloyds: 2013 net profit reduced by 5% by the levy; 2013 net profit reduced by 0% when reduced corporation tax also taken into consideration.

Standard Chartered: 2013 net profit reduced by 2% by the levy; 2013 net profit reduced by 1% when reduced corporation tax also taken into consideration.

HSBC: 2013 net profit reduced by 6% by the levy; 2013 net profit reduced by 4% when reduced corporation tax also taken into consideration.

The levy is being raised at a rate of 7 basis points of total liabilities, less tier 1 capital, insured retail deposits, repos on sovereign debt, insurance policyholder liabilities and derivatives. Wholesale funding of greater than one year is being taxed at 3.5 basis points.

Notably, the full levy won't come in until 2012 (offering an opportunity for balance sheet restructuring in the intervening period). In 2011-2012 the Office of Budgetary Responsibility expects it to raise just 1.1bn.

Corporation tax is being reduced by 1% per annum between now and 2014.

Pay will fall anyway

The lower than expected levy is unlikely to grant much of a reprieve to banking pay. Osborne hasn't ruled out the imposition of a FAT (financial activities tax) directly on bonuses.

Equally, financial regulation is increasing. And as the graph below, taken from the notorious NYU Stern study of historical banking pay, shows, the relationship between regulation and compensation is quite clearly negative.

Source: Wages and Human Capital

in the U.S. Financial Industry: 1909-2006