Friday’s £6.4 billion market rout served as a painful reminder to investors of a fundamental truth: banks are, and always will be, a politically sensitive investment. The sector’s fortunes are uniquely tied to the whims of government policy, a fact that was brutally highlighted by the sudden emergence of a windfall tax threat.
The IPPR’s proposal to tax the “windfalls” from quantitative easing is a classic example of the political risk inherent in banking stocks. Because they operate at the heart of the economy and were the recipients of public bailouts in 2008, banks are perpetually vulnerable to being targeted by politicians looking to score points or raise revenue.
The sharp fall in the share prices of NatWest, Lloyds, and Barclays reflects the market’s pricing-in of this political risk. It is an acknowledgment that, regardless of their underlying performance, their profitability can be altered overnight by a single line in a budget speech.
This inherent sensitivity means that investors in banks are never just betting on interest rates or loan growth; they are also betting on the political climate. Friday’s events were a painful reminder that this political bet can sometimes go very, very wrong.