Bank deposit guarantee scheme under review amid global bank failures

Bank deposit guarantee scheme under review amid global bank failures

Governor Andrew Bailey has revealed that the Bank of England is contemplating reforms to the UK’s bank deposit insurance guarantee scheme, which may result in increased protection for customers.

This discussion comes after high-profile bank failures in both the US and UK, leading Mr Bailey to suggest that the UK may need to raise its guaranteed deposit limit beyond the current £85,000, a figure significantly lower than the US’s $250,000 (c.£200,000) limit.

Addressing the Institute of International Finance in Washington, Mr Bailey expressed concerns about the existing UK scheme’s effectiveness for smaller banks and questioned the clear dividing line between guaranteed and non-guaranteed deposits. He acknowledged the challenges smaller institutions face in issuing long-term debt and suggested that deposit insurance might be the solution.

Although Mr Bailey said he believes UK banks are “well capitalised, liquid and able to serve their customers and support the economy”, he stressed “we can’t assume that, going forwards, the current answer on the total size of liquidity protection is the correct one”.

Mr Bailey added: “We saw with Silicon Valley Bank that with the technology we have today — both in terms of communication and speed of access to bank accounts — runs can go further much more quickly.

“This must beg the question of what are appropriate and desired liquidity buffers that create the time needed to take action to solve the problem.”

Considering this, the Bank of England is also exploring ways to increase the speed of payouts under the guarantee scheme, which is managed by the Financial Services Compensation Scheme for smaller banks. Mr Bailey emphasised that any increase in the £85,000 limit could have cost implications for the entire banking sector.

Despite financial stability concerns, Bailey maintained that monetary authorities should continue to maintain high interest rates to combat inflation. He assured that the Bank of England would consider credit conditions when setting interest rates, aligning with International Monetary Fund (IMF) recommendations.

The IMF advised separating monetary policy from financial stability considerations, although it acknowledged that interest rates may need to be lowered to protect the financial system if conditions deteriorate significantly. IMF chief economist, Pierre-Olivier Gourinchas, asserted that current global financial issues were not close to those conditions.

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