Bank of England Governor suggests British Guarantee Scheme does not work as intended, especially for smaller lendersAndrew Bailey has said the Bank of England is working on reform of Britain’s bank deposit insurance guarantee scheme, raising the prospect of increased protection for customers.
In response to the high-profile bank failures across the Atlantic, the BoE Governor suggested that the UK could need to raise its guaranteed deposit limit to PS85,000. This is much lower than $250,000 in the US.
Bailey stated that the UK scheme is unlikely to work for smaller banks. He also questioned the rule that deposits that were guaranteed would be separated from those that weren’t. “Practice, I would suggest points to the difficulty of the principle,” Bailey told the Institute of International Finance, Washington.
Both the UK and the US insisted last month that depositors shouldn’t suffer losses from the fall of Silicon Valley Bank. While US regulators provided protection for both insured and non-insured depositors, their British counterparts sold the UK arm of the lender to HSBC for £1.
SVB and Credit Suisse rans also highlighted the vulnerability of banks to depositors withdrawing money out of fear they might lose their money.
The UK Treasury would make the final decision on whether to raise the UK’s formal £85,000 limit. This limit has been in effect since 2017.
Bailey pointed out that while large banks have an additional layer of loss-absorbing capital called “eligible liability”, to reassure depositors this was not available to smaller lenders.
He said that he believes the solution lies in the worlds of deposit insurance, while acknowledging the difficulties smaller institutions have in issuing long-term loans.
According to the BoE governor, in addition to considering whether the current limit is sufficient to reassure savers with small lenders, the bank also works on speeding up payouts under its guarantee scheme.
Financial Services Compensation Scheme is the UK’s scheme to help smaller banks. It protects customers of financial service firms that have failed.
Bailey stated that deposit insurance is not functioning as it should in an era of electronic transfers and possible bank run-ups.
He said however that an increase in the £85,000 limit could “cost implications” for the entire banking sector.
He maintained, however, that financial stability should not stop monetary authorities keeping interest rates high in order to combat inflation.
He stated, “What we haven’t done and shouldn’t do is aim at our preferred setting for monetary policy due to financial instability.” “That hasn’t happened.”
He said, “Today I don’t believe we face systemic banking crises.”
The BoE governor said that his institution would consider credit conditions when setting interest rate — a move in line with IMF recommendations.
The fund recommended seperating monetary policy and financial stability at its spring meeting. It acknowledged that rates could be reduced if financial conditions are sufficiently bad to prevent financial collapse.
Pierre-Olivier Gourinchas is the chief economist at IMF. He stated: “If we found ourselves in a position of a systemic fiscal crisis. . . It is clear that financial stability and price stability are the primary goals in the short term.
Gourinchas claimed, however that the recent global financial troubles “were not at all near at all those circumstances.”