The HMT consultation and the Bank of England’s Levy Framework Document follow HMT’s 2021 consultation. Currently banks and building societies place a proportion of their eligible deposits in non-interest bearing deposits, which the Bank then invests in gilts to earn a return that funds its policy functions. But from 2024 instead they will pay a Levy, providing the Bank with a more reliable source of funds, unaffected by changes in interest rates.

Whilst being fully supportive of the change in funding arrangements we did point out that the Bank’s policy functions include a range of activities including those that support its Financial Stability Strategy and Risk work, as well as international engagement and co-ordination.

There is currently significant work being carried out on the role of Non-Bank Financial Institutions (NBFIs) in the financial system both domestically and internationally. For instance at the end of 2022 the Bank undertook important work to improve the resilience of  liability-driven investment funds, is examining the practicalities of developing an NBFI lending tool and is currently undertaking its System-wide exploratory scenario probing the possible behaviours of banks and NBFIs in stressed financial market conditions. And the Bank of England, quite properly, is a leading light in the important work being undertaken by the Financial Stability Board on NBFI’s potential to cause instability in the large financial services eco-system. As recent experience has shown, NBFIs can be a source of vulnerability to the wider financial system, including through NBFI’s use of  liquidity transformation and leverage by collective investment vehicles.

Our members fully support this current focus on the possible impact of NBFIs on financial stability and accept that they are currently subsidising the exploratory work that different policy areas of the Bank are undertaking on NBFIs, but do not necessarily want to pay for it in perpetuity!

We understand that it is unreasonable to expect the BoE to have a mechanism in place for NBFIs to make a contribution to the Levy at the point of its introduction but in our response we suggested that  the Bank should explore how to appropriately and proportionately expand the Levy to NBFIs to ensure they pay their fair share. Without this, another drag on deposit taking institutions will be introduced to the advantage of their less regulated competitors undertaking bank-like activities.