Tough Talk in U.K. on Banks, Starbucks Taxes

BoE deputy governor, FSA, MPs talk reserves, tax investigation

The U.K. was sounding a note of authority with assertions that banks should be compelled to hold a certain amount of capital and threats of an investigation into Starbucks’ tax affairs.

Starbucks logoReuters reported Wednesday that Bank of England (BoE) Deputy Governor Paul Tucker said in a speech to the British Bankers’ Association (BBA) that banks should be required to hold capital reserves in amounts set by regulators and not by the banks themselves, because allowing banks to calculate their own reserves is not safe.

Tucker, front-runner to be the next head of the BoE, was quoted saying, "Leaving banks completely free to choose risk-weights, using internal models, is not safe. It effectively allows banks to determine their own regulatory capital requirements, which hardly fits with society's purpose in regulating banking in the first place."

Adding to the dire tone on reserves, Andrew Bailey, head of prudential regulation at the Financial Services Authority (FSA), said that British banks may no longer be permitted to cut capital reserves if such cuts do not increase lending while the economy struggles or if they pose a threat to financial stability.

While in September the BoE Financial Policy Committee (FPC) said that banks don’t have to retain as much capital, it also said that banks should bolster their reserves through profit retention and bonus cuts. The mixed messages have been a source of complaint for banks, and Bailey said that regulators are working on clearer explanations of requirements.

Meanwhile, Starbucks came in for some parliamentary action as Margaret Hodge, chairwoman of the Public Accounts Committee (PAC) and an MP for the center-left opposition Labor party, called for an investigation into Starbucks’ tax practices by Her Majesty's Revenue and Customs (HMRC), the U.K. tax authority, after a Reuters report earlier in the week revealed that the company told its investors one thing while saying something entirely different to the tax man. Hodge has the authority to launch an investigation.

Starbucks has been telling investors that its U.K. operations were highly profitable and at the same time claiming losses that cut its tax bill in Britain to nothing on tax on 1.2 billion pounds ($1.93 billion) of sales since 2009. Hodge has said that questions about Starbucks will be posed next month to the head of HMRC, who will be testifying to the PAC, which is tasked with ensuring value in government financial affairs.

Conservative party member and MP Steve Baker also called for an inquiry. He was quoted saying, "I am a highly free market person but what I want is simple transparent tax law that is actually obeyed ... there are some serious questions to answer here."

Reprints Discuss this story
This is where the comments go.