1: Overview
1.1 This policy statement (PS) provides feedback to responses to the Bank’s consultation paper (CP): Bank of England Levy Framework Document.
1.2 This PS is relevant to ‘eligible institutions’, as defined in paragraph 2 of Schedule 2ZA of the Bank of England Act 1998. Such institutions will broadly be UK deposit-taking institutions authorised under the Financial Services and Markets Act 2000. The definition of an eligible institution includes banks and building societies.
2: Background
2.1 The Bank’s consultation explained how the annual Bank of England Levy will be charged and how it will operate, in addition to explaining the Bank’s approach to levying the amounts required in connection with its policy functions, which are the functions exercised by the Bank in pursuit of its Financial Stability and Monetary Policy objectives.
2.2 The Levy will replace the Cash Ratio Deposit (CRD) scheme, to deliver a more reliable and stable funding scheme for the Bank’s policy functions.
2.3 Through the Bank’s consultation, Levy payers and the public were provided with an opportunity to understand how the Levy will operate and make their views known on the proposals prior to the commencement of the Levy.
2.4 The consultation noted that the Government will continue to monitor the effectiveness of the Levy funding model to meet the Bank’s policy costs and will conduct a further formal review within at least five years from commencement of the Levy.
3: Summary of responses
3.1 The Bank received formal written responses to the consultation from one respondent. The respondent noted that:
- It would be beneficial to see the planned sell-down programme for the Bank’s gilt portfolio.
- The Bank could include Non-Bank Financial Institutions as eligible institutions in the future.
- It would be helpful if the Bank adopted a rolling five-year budget to help institutions plan their own budgets.
- The reference period used for calculating the Anticipated Levy Requirement could be a broader period.
- Clarification on the accounting treatment for the Levy would be useful.
3.2 The Bank welcomes and has considered these responses, noting the below in response:
- Under current market conditions the Bank has determined that retaining the portfolio of gilts on its balance sheet is the most appropriate initial course of action. The return of CRDs to institutions will create a transitional cost to the Bank as it remunerates the reserves created, with the income available from the gilt portfolio then being used to reduce the ultimate charge to firms. It is this transitional cost that the Framework Document sets out as being part of the Bank’s total policy costs, and which will decrease in line with decreases in the size of the gilt portfolio. The gilt portfolio will reduce in line with its maturity profile, with over half of the gilts in the portfolio maturing by 2029, and the remainder steadily running off over the following 10–15 years. The bank does not intend to sell the gilts from the CRD portfolio, with the size expected to reduce as the gilts in the portfolio mature. While the Bank maintains the discretion to change this approach in the future, any change in approach would as far as possible be communicated well in advance, and ultimately designed to minimise any resulting impact on market functioning and/or conditions. The run-off rate of the portfolio is small when compared to the total size of the Asset Purchase Facility (APF) gilt portfolio. Given this small size, decisions on the APF will not be influenced by the CRD portfolio gilts. Decisions on the targeted stock of assets in the APF for monetary policy purposes are taken independently by the Monetary Policy Committee (MPC), solely to meet the MPC’s policy objectives.
- The Bank notes that the response indicated that the definition of eligible institutions was not likely to be changed immediately but called for this to be considered at a future date. The formal review referred to in Section 2.4 is expected to include assessment of which institutions are regarded as eligible to pay the Levy.
- The Bank welcomes the suggestion to adopt a rolling five-year budget plan and will consider this further.
- The Bank notes the potential risks around the reference period highlighted in the response. One of the aims of the Bank of England Levy is to introduce more simplicity to the process of recovering the Bank’s policy costs, and so the reference period used in connection with calculating the amount of Levy an institution is required to pay mirrors that used for the Prudential Regulation Authority Levy, which also uses eligible liabilities data for deposit-takers, in addition to being the same period as other industry wide levies. The Bank therefore considers the proposed reference period to be appropriate.
- The accounting treatment of the Bank of England Levy is not in scope of the consultation.
4: Implementation
4.1 The Bank has considered the responses received to the CP and, subject to Parliamentary approval, will progress with commencing the Bank of England Levy.