The UK Government has introduced a permanent levy on banks' balance sheets as it believes that banks should make a full and fair contribution in respect of the potential risks they pose on the wider economy.
Once fully in place the levy is expected to raise around £2.5bn of annual revenues. This is in line with the Budget estimates.
The levy is intended to encourage banks to move to less risky funding profiles.
The rate for 2011 will be 0.05%, and it will rise to 0.075% from 2012 onwards.
The tax has two objectives. Firstly, it is intended to encourage banks to move to more stable sources of funding, such as long-term debt and equity. Secondly, the government says it represents a fair contribution by the banks towards the risks the banking system poses to the wider economy.
Financial Secretary to the Treasury Mark Hoban said the levy which comes into force today means that banks will now make a full and fair contribution in respect of the potential risks they pose to the wider economy. This measure will also encourage banks to reduce their dependence on the riskier, short term funding that was one of the main causes of the financial crisis.
"Once fully in place the bank levy is set to raise £2.5bn per annum and this will go towards helping reduce the record Budget deficit that this Government inherited," Hoban added.