Banks face a £2bn tax hike from a new banking levy charged at 0.07 per cent of liabilities – with the Chancellor, George Osborne, warning of the possibility of more to come.
But as news of the new tax swept around the City's dealing rooms, banking shares regained some lost ground with investors taking the view that the levy could have been far harsher.
The announcement of the new tax, which will affect British banks and the subsidiaries of foreign owned banks operating here, was accompanied by a joint statement with the French and German governments confirming that they too would introduce levies.
At the close of trading yesterday, Lloyds Banking Group shares finished up 2.34p at 59p and Royal Bank of Scotland gained 0.31p to 47.08p. Barclays and HSBC both lost ground slightly, but their shares were lower before details of the new tax was announced, even though Mr Osborne said the levy could be followed by a transaction tax.
The three governments said in the joint statement: "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk. The specific design of each may differ to reflect our different domestic circumstances and tax systems, but the level of the levy will take into consideration the need to ensure a level playing field."
The £2bn estimated gain to the Exchequer from the levy is less than the £2.5bn generated from the one-off bank bonus tax introduced by the previous Chancellor, Alistair Darling. And it is a mere fraction of the £50bn a year which was the estimated annual subsidy provided to the top five UK banks between 2007 and 2009 by Andrew Haldane, the Bank of England's executive director for financial stability, in a speech he made in March.
But one banking industry source pointed out that buried within the Treasury's Budget "red book" was a figure showing that using the latest market prices "the cost of the financial sector interventions, net of fees and other income, is estimated at £2bn".
That compares to £6bn at the stage of the March budget and £8bn at the time of the December pre-Budget report. The cost has fallen sharply because of fees and rises in the share prices of Royal Bank of Scotland and Lloyds Banking Group.
But the red book also noted that "the estimate reflects the potential direct costs of the Government's support provided to the financial sector and does not include the much more significant wider costs of the financial crisis to the economy as a whole".
John Cullinane, a financial services tax partner at Deloitte, said: "I think this levy is really about revenue and targeting an unpopular and controversial industry. This probably won't do very much to change banks' behaviour or stop them from taking risks."
The British Bankers' Association gave the new levy a measured response, but it warned ministers not to jeopardise Britain's national competitiveness.
"The banking industry fully understands the part it must play in helping the UK's economic recovery. We know this is a difficult Budget for everyone and the banking industry will work to meet its obligations in helping bring the economy back to strength," it said.
"The UK is a trading nation and we must ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here. This levy is to apply to all major banks and building societies operating in the UK regardless of nationality. We are a large financial centre and a great many jobs are created here as a result."
Stuart Fraser, policy chairman at the City of London Corporation, said the levy "risks sending a message that the banks are still seen as a cash-cow". He added: "We should bear in mind that our competitors in the future – particularly in Asia – have no intention of joining us."