Market volatility in the UK banking sector spiked dramatically on Friday as the government’s fiscal options came under intense debate, with a proposal to tax lenders taking centre stage. The debate, sparked by a thinktank report, quickly translated into a £6.4 billion loss for banking stocks as investors reacted to the increased policy uncertainty.
With a £40 billion budget deficit to contend with, all options—including controversial ones—are on the table. The IPPR’s suggestion of a windfall tax on banks to reclaim the £22 billion annual cost of the QE program has thrown a particularly flammable log onto the fire.
The spike in volatility was evident in the sharp, downward movements of bank share prices. NatWest fell nearly 5%, and Lloyds over 3%, as traders reacted to the news flow. This kind of volatility is toxic for long-term investment and reflects a market that is nervous and unsure about the government’s future direction.
Analysts warn that this debate over fiscal options needs to be handled carefully. Floating radical ideas like a new bank tax can create instability, as seen on Friday. The government now faces the challenge of reassuring the markets that it will pursue a stable and predictable fiscal path, even as it grapples with its significant financial problems.