The Bank of England Considering Reforms to Deposit Guarantee Plan

According to reports, the Bank of England is considering significant reforms to its deposit guarantee plan, including increasing the amount of deposit guarantee for businesses and forcing banks to provide more pre funding for the system to ensure faster access to cash in the event of bank failure. According to insiders, the Financial Services Compensation Scheme (FSCS) in the UK is undergoing emergency review after the rapid bankruptcy of Silicon Valley Bank last month. The above-mentioned insiders stated that regulatory authorities are concerned that the current £ 85000 guarantee limit can only cover about two-thirds of deposits, and the relatively low pre financing level means that customers will have to delay at least a week to regain cash. These deficiencies have weakened people’s confidence in FSCS and reduced its effectiveness in preventing bank runs. However, raising the guarantee threshold and raising the pre financing level is costly for banks, who have long lobbied the Ministry of Finance against such changes.

The Bank of England is considering urgent reforms to its deposit protection plan

The Bank of England, which is the central bank of the United Kingdom, is currently exploring significant changes to its deposit guarantee plan. According to reports, these reforms will include increasing the amount of deposit guarantee for businesses and requiring banks to provide more pre-funding for the system. The objective of these changes is to ensure faster access to cash in the event of a bank failure.

Background

Before we dive deeper into the proposed changes, let’s have a quick overview of the current deposit guarantee plan in the UK. The Financial Services Compensation Scheme (FSCS) is a statutory fund that provides insurance coverage for individuals and small to medium-sized businesses in the UK in the event of a bank failure. The maximum amount of coverage under this plan is £85,000 per individual or entity, per institution (as of January 2021). The FSCS is funded by the financial services industry and is regulated by the Financial Conduct Authority (FCA).

The Need for Reform

The FSCS is currently undergoing emergency review after the Silicon Valley Bank’s bankruptcy last month. According to insiders, regulatory authorities are concerned that the current guarantee limit of £85,000 can only cover about two-thirds of deposits. Moreover, the relatively low pre-financing level means that customers will have to wait at least a week to regain their cash, which has weakened people’s confidence in the FSCS and reduced its effectiveness in preventing bank runs.
It is worth mentioning that the £85,000 cap was set in 2015 and has not been adjusted for inflation since, resulting in a decrease in its value. Hence, it is necessary to raise the guarantee threshold to provide adequate protection to depositors.

Proposed Changes

The Bank of England is considering increasing the amount of deposit guarantee for businesses, which will undoubtedly ease the pressure on struggling small and medium-sized businesses hit hard by the COVID-19 pandemic. Furthermore, it is also considering forcing banks to provide more pre-funding for the FSCS. This will ensure faster access to cash in the event of a bank failure and restore people’s confidence in the scheme.
However, these changes may come at a cost for banks, who have long lobbied the Ministry of Finance against such changes. Presumably, this is because of the additional financial burden it may place on them, as the extra pre-funding requirements will increase their operating costs.

Conclusion

To sum up, the Bank of England is exploring significant reforms to improve the deposit guarantee plan in the UK. The proposed changes, which may include raising the amount of deposit guarantee for businesses and requiring banks to provide more pre-funding for the scheme, will provide better protection to depositors and restore people’s confidence in the FSCS. While these changes may be costly for banks, they are necessary to safeguard the financial system and prevent future bank runs.

FAQs

1. What is the Financial Services Compensation Scheme (FSCS)?

The FSCS is a statutory fund that provides insurance coverage for individuals and small to medium-sized businesses in the UK in the event of a bank failure.

2. What is the current deposit guarantee limit in the UK?

The current deposit guarantee limit in the UK is £85,000 per individual or entity, per institution (as of January 2021).

3. Why do proposed changes to the deposit guarantee plan matter?

Proposed changes may come at a cost for banks, but they are necessary to provide better protection to depositors and restore people’s confidence in the FSCS.