The Bank of England is considering a major overhaul of its deposit guarantee scheme, including increasing the amount covered for businesses and requiring banks to pre-fund the scheme more to ensure faster access to cash when a lender fails .
The UK’s Financial Services Compensation Scheme is under urgent review after the rapid failure of Silicon Valley Bank last month, when billions were withdrawn in panic from SVB’s UK subsidiary overnight, people briefed on the BoE’s thinking told the Financial Times.
Regulators fear that the current £85,000 limit of the guarantee will cover around two-thirds of deposits and that the relatively low level of pre-funding means there is a delay of at least a week for customers to regain the access to their money, the people said. .
They added that these shortcomings undermined trust in the FSCS and reduced its effectiveness in preventing bank runs. However, raising the threshold and raising the level of pre-funding would be costly for lenders, who have long lobbied the Treasury against such changes.
The BoE declined to comment.
The loopholes in UK rules compared to those in the US were exposed when SVB descended into insolvency in mid-March. Regulators on both sides of the Atlantic have moved quickly to pledge that customers will not 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 access their money the next business day because the Federal Deposit Insurance Corporation pre-funds its guarantee program via the insurance premiums paid by the banks. The US also guarantees deposits up to $250,000, compared to £85,000 in the UK.
The UK also has lower levels of advance funding for the FSCS, leading the Prudential Regulation Authority, the part of the BoE that regulates financial services, to warn customers they should wait at least seven days for their money if the British branch of SVB went bankrupt.
As it happens, the government brokered a deal over the weekend sell SVB UK to HSBC for £1so that customers were not locked out of their accounts.
Nonetheless, the close call prompted BoE Governor Andrew Bailey and Jeremy Hunt, the Chancellor, to publicly call for reform of the system, both floating around the idea of increasing the guaranteed amount, which was set in 2017.
“We need to look at deposit insurance and keep it under review,” Hunt said the Financial Times last week. If the supervisors recommend that the limit be increased, “I will see on my desk how we finance this increase”.
Regulators are considering increasing the amount insured for small businesses, which need constant access to cash to pay suppliers and staff, the people said. For many, the current level is simply too low to make a difference.
An alternative being considered could be to increase the guaranteed amount for specific uses, such as working capital, one of the people said.
The need to increase the £85,000 limit for individuals is less urgent, but that will also be reviewed, they added.
A higher level of pre-funding in the UK might also be needed to speed up disbursements. This could be augmented by charging banks higher premiums based on their size and risk, which one person involved said could “open a Pandora’s box”.
“Such ruminations come as no surprise,” said Numis analyst Jonathan Pierce, who estimates that deposit protection in the UK currently only covers 65% of retail and small business balances and around 50% of all deposits, including large companies.
“Any increase in deposit protection would add ‘one-time’ costs to banks and is one of the potentially most significant consequences of recent events,” Pierce added.
Under a plan agreed when the UK was still part of the EU, banks had until 2024 to build up a pre-fund equal to 0.8% of covered deposits. In the United States, at the end of 2022, the FDIC fund had $128.2 billion in reserve, or 1.27% of the insured funds, and it plans to increase this to 2 percent over time.
Strengthening deposit insurance would also boost confidence in smaller UK banks. They are not required to build the same level of loss-absorbing capital reserves as their big rivals and therefore offer less protection for uninsured deposits in the event of default.
They also face higher costs to issue long-term debt, which was only made worse by a reduced appetite for financial bonds after the collapses of SVB and Credit Suisse.
Noting these difficulties, BoE Governor Bailey said in a speech last week“I think the answer here lies in the world of deposit insurance.”