Confidence in the UK banking sector crumbled on Friday, leading to a £6.4 billion loss in market value as a single rumour about a new tax hit share prices hard. A report from the IPPR thinktank proposing a windfall levy on lenders was the source of the rumour, which spread through the market like wildfire.
The core of the rumour is that the government, desperate to fill a £40 billion fiscal hole, will be tempted to adopt the IPPR’s proposal. The proposal targets the £22 billion annual cost of paying interest on bank reserves, a legacy of the quantitative easing program, framing it as a “windfall” ripe for taxation.
The crumbling of confidence was evident in the sharp sell-off of banking stocks. NatWest shares fell nearly 5%, while Lloyds and Barclays also suffered heavy losses. This shows that in the current uncertain climate, investors are not willing to wait for official confirmation before reacting to perceived threats.
This episode is a case study in how rumours can move markets. Richard Hunter of Interactive Investor noted that such suggestions have an “exaggerated impact” due to the government’s known financial troubles. The result is a volatile and nervous market where confidence is fragile and easily broken.