Figures in the banking sector are divided over suggested reform to deposit protection, with regulators reported to be mulling raising the deposit insurance threshold in the wake of the collapse of Silicon Valley Bank (SVB) last month.
According to a report from the Financial Times, regulators are considering updating the Financial Services Compensation Scheme (FSCS) in order to shore the system up with tighter liquidity rules and greater deposit protection.
According to the report, regulators worry the current £85,000 threshold for deposit insurance is too low and the lack of pre-funding for the FSCS means there’s delays for customers to regain access to their cash.
However, sources in the banking sector were divided about the impact this would have, with deposits under the current system insured through levies on banks, meaning lenders could face greater costs under the proposed reforms.
Under the current system, the FSCS insures deposits up to £85,000. However, it is not pre-funded, as other forms of deposit insurance around the world are, meaning the Treasury – and therefore the taxpayer – is the first line of defence in the event of a bank collapse.
If deposits have to be paid out, the FSCS then claims back Treasury funds through levies on banks. More deposit protection would therefore impose greater costs on banks as in the end deposits are insured through levies on banks.
Banking regulation and deposit compensation
One bank source suggested the suggest reforms could improve bank resilience and consumer protection, particularly for smaller banks. Another said that an increase to the deposit ceiling would strengthen consumer confidence in the banking sector.
However, others suggested that higher levies would simply add another cost to a sector already struggling to develop a convincing investment story.
They also suggested that the particular concentration risks at SVB were relatively unusual and so did not merit a rush to regulation in the UK context.
Thanks to technological advances, SVB saw $42bn in outflows in a single day – the largest bank run in history.
Lee Doyle, partner at Ashurst, said: ‘‘Digitalisation and increased (social) media coverage means a ‘run’ on a bank is both more likely and swifter to occur. Anything to control or delay such a tidal wave effect of concern must be seen positively.
“Clearly such a step will come with a cost to the sector in some form, but it would be a small price to pay to avoid a run such as occurred on SVB.”
Meanwhile, John Vickers, who is one of the architects of the UK’s regulatory framework, suggested that an increase in deposit protection should be seen as a “quid pro quo” for holding more capital and that shielding more money from bank failures would expose taxpayers to risk.
Aside from the greater protection, one figure in the banking sector suggested the current FSCS funding rules are out of date.
As it is not pre-funded, it takes time for customers to receive cheques which come from the Treasury. Had SVB not been taken over by HSBC, its depositors would have faced a ten day wait to receive their funds.
This wait could end up being too long for many companies if they have to pay employees in that time. Pre-funding the FSCS could reduce the waiting time.
One source argued regulators should use this opportunity as a chance to recalibrate the relative weight of deposit protection and capital requirements.
The relatively low level of deposit protection is one of the reasons why smaller UK banks have more stringent capital requirements than global peers, the source suggested.
For smaller banks in the UK, who are infrequent issuers or have little experience in the capital market, raising capital can be very expensive. Reforming deposit protection could enhance competition by freeing up capital in the UK’s smaller banks.