UK looks to do EU deal on deposit protection

Tim Wallace
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SAVERS and firms with big bank deposits could still get a degree of protection when lenders collapse, despite having more money than the insured limit, the Bank of England’s Paul Tucker said yesterday.

The deputy governor said there is a case for making some uninsured depositors senior to bondholders in the creditor hierarchy, despite chancellor George Osborne rejecting extra protection for depositors at a European meeting last week.

“I can see a case for some uninsured depositors being preferred – that would help to provide some protection for users of the monetary services that banks provide via overnight and short-term deposits; it could provide a small degree of protection against runs; and there could be an element of social justice in insulating, say, small firms and charities from the first line of loss,” Tucker said. “But I am doubtful whether very large, wholesale deposits placed at term maturities (e.g. billions of pounds for six months or more) should be preferred.”

His comments hint that Osborne could be open to negotiations on the topic.

The chancellor fears that offering protection to depositors could distort the market in bonds, encouraging investors to leave money on deposit instead of buying the debt instruments, thanks to the higher level of protection.

And he is also concerned that by extending protection to more and more investors the actually level of protection becomes more thinly spread, leaving each one in fact less safe.

But he may prove open to persuasion.

“I think for uninsured depositors it is a more complicated issue and I think this is something we should give further consideration to,” Osborne told EU finance ministers last week.