Bank of England Proactively Addresses Deposit Guarantee Scheme Reform
Bank of England Urgently Reviews Deposit Guarantee Scheme: Is It Enough?
Last month, Silicon Valley Bank (SVB) in the UK suffered a rapid failure, resulting in billions of pounds being withdrawn from the bank overnight. This has prompted the Bank of England regulators to review their deposit guarantee scheme urgently. The Financial Services Compensation Scheme (FSCS) guarantees up to £85,000 in deposits per individual or business. However, this has been found to only cover about two-thirds of deposits. As a result, the Bank of England is now considering an overhaul of the FSCS, including increasing the amount covered and forcing banks to pre-fund the scheme to a greater extent.
What are the Proposed Changes?
The Bank of England is considering increasing the amount insured for small businesses, which need consistent access to cash to pay suppliers and staff. The current level of £85,000 is considered too low for many small businesses, and increasing this amount could prevent a rush on the bank in the event of a failure. Another proposed change involves pre-funding the scheme to a greater extent, ensuring faster access to cash for customers if a lender were to collapse. Currently, at least one week is delayed for customers to regain access to their money due to low pre-funding levels.
Cost vs. Benefit
While these proposed changes would increase the effectiveness of the deposit guarantee scheme and prevent bank runs, they would also come at a cost to lenders. The banking industry has long lobbied against changes to increase the amount covered or pre-funded. These changes would also require the government to finance the increase in coverage, which would affect taxpayers. However, the cost of not making these changes could be more significant. If a bank run were to occur, the financial cost and loss of confidence in the financial system could be devastating.
Related Facts
- The US deposit guarantee scheme covers up to $250,000, substantially higher than the UK’s £85,000 limit. The US also pre-funds its guarantee program via insurance premiums paid by banks, allowing customers to access their money by the next working day in case of a bank failure.
- The UK’s low levels of pre-funding led to the Prudential Regulation Authority warning that customers would wait at least seven days for their cash if SVB’s UK arm went bankrupt.
- The close call with SVB’s failure has prompted the Bank of England Governor and the Chancellor to call for urgent reform of the deposit guarantee scheme.
Key Takeaway
Reviewing the deposit guarantee scheme by the Bank of England is a necessary and welcome action. However, it remains to be seen whether the proposed changes will be enough to prevent bank runs and protect customers in the event of a bank failure. Implementing these changes may concern the banking industry and the government, but the cost of not making these changes could be far more significant in the long run.
Conclusion
The deposit guarantee scheme is a vital component of the financial system to protect individuals and businesses from a potential loss of their savings. Yet, in the UK, the project has been found to have shortcomings, such as a low limit of coverage and low levels of pre-funding. Reviewing the scheme by the Bank of England is a positive step towards ensuring that individuals and businesses are protected in case of a bank failure. The proposed changes may come with a cost, but the cost of not making these changes could be far more significant. However, it remains to be seen whether the proposed changes will be enough to prevent bank runs and protect customers in the event of a bank failure.
