Andrew 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.
Speaking in response to high-profile bank failures on both sides of the Atlantic, the BoE governor suggested the UK might need to increase its limit for guaranteed deposits above the current £85,000 — which is far lower than the $250,000 level in the US.
Bailey said the current UK scheme was unlikely to work as intended for smaller banks and questioned the rule that there was a clear dividing line between deposits that were guaranteed and ones that were not. “Practice, I would suggest, points to the difficulty of this principle,” he told the Institute of International Finance in Washington.
Last month both the US and UK insisted depositors should not incur losses due to the collapse of Silicon Valley Bank. US regulators protected both insured and uninsured depositors alike, while their British counterparts sold the lender’s UK arm to HSBC for £1.
The runs on both SVB and Credit Suisse also highlighted banks’ vulnerability to depositors withdrawing funds out of concern they could lose their money.
A final decision to increase the UK’s formal £85,000 limit, which has been in place since 2017, would rest with the UK Treasury acting on a recommendation by the BoE.
Bailey noted that, while large banks had an additional tier of loss-absorbing capital, called “eligible liabilities”, to reassure depositors, this did not apply to smaller lenders.
“I think the answer here lies in the world of deposit insurance,” he said, acknowledging the difficulty smaller institutions face in issuing long-term debt.
The BoE governor said that as well as considering if the current limit was sufficient to reassure savers, particularly with smaller lenders, the bank was also working on increasing the speed of payouts under the guarantee scheme.
The UK’s scheme for smaller banks is run by the Financial Services Compensation Scheme, which protects customers of financial services firms that have failed.
Bailey suggested deposit insurance was not working as intended in a world with electronic transfers and potentially rapid bank runs.
But he said that any increase in the £85,000 limit could have “cost implications for the banking sector as a whole”, warning “As with all things relating to bank resolution, there is no free lunch.”
He also maintained that financial stability concerns should not prevent monetary authorities from keeping interest rates high to attack inflation.
“What we have not done — and should not do — is in any sense aim off our preferred setting of monetary policy because of financial instability,” he said. “That has not happened.”
He added: “Today I do not believe we face a systemic banking crisis”.
But the BoE governor also said his institution would look at credit conditions when setting interest rates — an approach in line with IMF recommendations.
At its spring meeting, the fund advised separating monetary policy from considerations of financial stability. However it conceded that if financial conditions deteriorated sufficiently, rates would need to be cut to protect the financial system.
Pierre-Olivier Gourinchas, IMF chief economist, said: “If we were to find ourselves in a situation of a systemic financial crisis . . . then it’s very clear that the objectives of financial stability take precedence over price stability in the near term”.
Gourinchas argued, however, that recent global financial problems “were not near at all those conditions.”
