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British banks have been spared the imminent cost of pre-funding a multibillion-pound deposit insurance guarantee scheme after the collapse of Silicon Valley Bank’s UK arm in March exposed weaknesses in existing protections.
The UK Treasury outlined “modest” reforms to bolster the regime for protecting smaller banks against failure and to improve resilience in the banking system in a consultation paper released on Thursday.
In the wake of the SVB crisis, top lenders had been bracing themselves for demands to pay large sums into the deposit guarantee scheme, which would be used to repay customers in the event of a future bank failure.
The Treasury on Thursday outlined a series of measures that it said would address issues raised in March “in a way that does not impose additional upfront financial costs for banks”.
The measures included a key proposal to use the Financial Services Compensation Scheme to fund a smaller bank that is failing, by recapitalising it and covering its operational costs.
The costs would “subsequently be funded through a levy on the banking sector”, the Treasury said.
The measures would reduce the likelihood of a run on deposits by enabling a bank to operate as normal through its difficulties, while allowing depositors to access funds in the usual way rather than waiting to be paid by the guarantee scheme.
“This proposal would introduce sensible and modest enhancements to the resolution regime to give the BoE increased flexibility to manage the failure of a small bank, without making significant changes to the regime itself and avoiding new upfront costs for firms,” the Treasury said.
When SVB’s parent company, the SVB Financial Group, collapsed Bank of England regulators warned UK depositors of wait times of at least seven days to receive their government-guaranteed deposits, capped at £85,000.
The situation sparked fears among companies who used their accounts to pay salaries and bills. The crisis was ultimately averted by the government-brokered sale of SVB’s UK arm to HSBC for £1.
Larger banks already have access to special debt and equity which they can use to recapitalise should they fail, meaning they are less vulnerable to depositors rushing to withdraw money.
The measures would “reinforce the UK’s robust regulatory regime and ensure there continues to be sufficient protections for financial stability, customers and public funds when banks fail”, the Treasury said.
The Treasury noted the BoE’s regulatory arm, the Prudential Regulation Authority, would carry out its regular review of the deposit guarantee limit in 2025.
The £85,000 limit, which has been in place since the end of 2010, is roughly the same as the EU’s €100,000 but well below the US’s $250,000, which regulators there have recommended increasing.
Some regulators have argued that pre-funding the deposit scheme was fairer because it required lenders that go on to fail to contribute to the cost of the regime during healthier years.
“The government is also open to feedback from respondents on alternative means of funding that could help meet the policy objectives over the longer-term, such as for example a pre-funded approach,” the Treasury said.
The BoE said it welcomed the consultation, which runs until March 7, and supported measures to continue to enhance the UK bank resolution regime.
Simon Hills, director of prudential policy at banking lobby group UK Finance, said: “The financial system demonstrated resilience in 2023. However, the introduction of a new resolution power allowing the FSCS to provide recapitalisation funding to a small bank is a practical measure which could help boost the resilience of the system.”
