The Bank of England has been considering a major overhaul of the deposit guarantee scheme. This includes increasing the amount of money covered by the scheme for businesses, and forcing banks pre-funding the system in greater amounts to ensure quicker access to cash if a lender fails.
People briefed about the BoE’s thinking say that the UK’s Financial Services Compensation Scheme has been urgently reviewed following Silicon Valley Bank ‘s rapid failure last week, when millions were withdrawn from SVB UK’s subsidiary in panic overnight.
The people who spoke to the regulators said that they are concerned about the fact that the current PS85,000 guarantee limit only covers two-thirds or deposits. They also noted that due to the low level of prefunding, it takes at least one week for the customers to get their money back.
These shortcomings, they said, undermine the confidence in the FSCS as well as its effectiveness at preventing bank runs. However, lenders would pay a high price for raising the threshold or the pre-funding level. They have long opposed such changes.
The BoE refused to comment.
SVB’s spiral into insolvency mid-March brought to light the flaws of the UK rules in comparison with those in the US. Both regulators on either side of the Atlantic acted quickly to ensure that customers wouldn’t suffer losses in order to stabilize the global financial system.
US authorities were able to promise that all insured and uninsured deposits would be protected and people could have access to their money by the next working day because the Federal Deposit Insurance Corporation If supervisors suggest that the limit be increased, “it will cross my desk regarding how to finance that increase”.
The people stated that regulators are looking at increasing the amount of insurance for small businesses. These companies need constant access to cash in order to pay their suppliers and employees. The current level of insurance is too low for many to notice any difference.
One person said that an alternative to consider could be to increase guaranteed amounts for specific purposes, such as working Capital.
They added that the need to increase the £85,000 individual limit is less urgent, but this will also be reviewed.
To speed up payments, a higher level of funding could be needed in the UK. The amount could be raised through charging higher premiums to banks based on the size and risk of their business. One person involved admitted that this could “open up a can” of worms.
Such ruminations, said Numis analyst Jonathan Pierce are not surprising. He estimates that UK deposit insurance currently covers 65 percent of balances for small businesses and retail customers and 50 percent of all deposits.
Pierce said that any increase in deposit protection could add “one-off” costs to banks, and this is one of the most important possible consequences of recent events.
A plan agreed upon when the UK was part of the EU required banks to have a prefund of 0.8 percent of their covered deposits by 2024. The FDIC fund in the US had $128.2bn of reserves at the end 2022. This is equivalent to 1.27 percent of insured funds. plans on increasing that to 2 percent over time.
It would also increase confidence in smaller UK banks. These smaller banks are not required by law to have the same capital buffers to absorb losses as their larger competitors and offer less protection for uninsured depositors if they fail.
The costs of issuing long-term bonds are also higher, and this has been made worse due to the reduced appetite for financial securities after the collapses at SVB and Credit Suisse.
In a recent speech , BoE Governor Bailey noted these difficulties and said: “I believe the solution lies in the worlds of deposit insurance.”