A Market Spooked: Bank Valuations Tumble on Policy Fright

The UK banking market was well and truly spooked on Friday, with valuations tumbling by £6.4 billion in a classic case of policy fright. A report from the IPPR thinktank suggesting a new windfall tax acted as the ghost in the machine, causing investors to flee in terror.
The source of the fright was the plausibility of the proposal. The IPPR’s argument—that the £22 billion annual cost of QE should be reclaimed from the banks—is a simple and powerful one. In the context of a £40 billion government deficit, it’s a narrative that investors fear the chancellor might find irresistible.
The tumbling valuations of NatWest, Lloyds, and Barclays were the physical manifestation of this fear. A spooked market does not wait for confirmation; it acts on the perceived threat, and the perceived threat on Friday was of a major, permanent blow to the sector’s profitability.
Overcoming this policy fright will now require a concerted effort from the government to reassure the City. Without clear signals that it will not pursue what the market sees as reckless and punitive measures, the sector will continue to be haunted by this proposal, to the detriment of both its shareholders and the wider economy.