LONDON (Reuters) – The Bank of England (BoE) has said it is considering “improvements” to the mechanism under which depositors can recover money in their accounts at smaller banks that get into difficulties.
The central bank has declined to elaborate on the measures under review but the following looks at the issues involved if the Bank does push ahead with increasing depositor protection.
WHY NOW?
Regulators were startled by the speed at which businesses pulled out over $40 billion from now collapsed Silicon Valley Bank (SVB) in the United States in just 24 hours in March, a process made easier and faster by advances in online banking.
U.S. regulators are reviewing their deposit insurance system, which fully protects deposits up to $250,000 in the event of a bank failure. They had to guarantee deposits in full at SVB to help restore confidence in the banking sector and avoid rapid, social media-driven runs.
The Bank of England’s review of its parallel programme, known as the UK Financial Services Compensation Scheme, predates the jolt to banking sector resilience triggered by SVB’s collapse and the emergency takeover of Credit Suisse.
Attention has focused on the pace of restoring funds to customers affected by bank failures, but there is speculation the Bank could also increase the threshold for insured deposits.
WHAT PROTECTION IS THERE IN BRITAIN?
Under laws passed when Britain was part of the European Union, UK consumer and business deposits are protected up to 85,000 pounds ($105,500), or 100,000 euros ($109,740) in the EU.
BoE Governor Andrew Bailey said last week the Bank was considering whether more needs to be done regarding insurance for depositors with smaller banks that don’t have eligible liabilities that can be tapped for payouts.
Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole, Bailey has said, warning there is no “free lunch”.
WHAT WOULD RAISING PROTECTION LEVEL ACHIEVE?
Raising the threshold of insured deposits could help to boost customer confidence and reduce the chance of deposit flight from smaller lenders during wider economic or sector stress.
Smaller banks may find it easier to hold onto business customers who could look to switch to larger rivals, if a greater proportion of their deposits were protected via a centralised scheme.
But some companies may still end up holding cash on deposit that is greater than the sums insured, and they could still pull out money at pace if they felt their bank was vulnerable.
WHO WOULD PAY FOR THE INCREASED PROTECTION?
A higher protection limit is likely to hike funding costs for the banking sector through higher levies to the scheme.
The burden is expected to fall heavier on larger banks but some smaller banks may also struggle to pay higher premiums, on top of the additional funding and capital challenges they already face.
This could ramp up pressure on their business models and profitability, which in turn could reduce competition across Britain’s banking sector.
($1 = 0.8057 pounds)
($1 = 0.9112 euros)
(Reporting by Huw Jones and Sinead Cruise; editing by John Stonestreet)
