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The Bank of England has proposed raising the amount of money covered by the UK deposit guarantee scheme from £85,000 to £110,000 under plans that are likely to increase the contribution lenders make to the scheme.
The central bank said on Monday that the plan to increase the protection for UK depositors from the start of December “takes into account inflation since the limit was last changed” and was designed to “give consumers confidence that their money is safe” if a lender fails.
Reform of the scheme for guaranteeing UK bank deposits has been on regulators’ agenda since the collapse of Silicon Valley Bank (SVB) in the US two years ago, which threatened to leave some depositors of its UK subsidiary exposed to delays in refunds and even losses.
The guarantee is funded by a levy paid by all authorised financial services companies to the Financial Services Compensation Scheme (FSCS), which has paid out more than £20bn to millions of customers at failed companies in the sector.
“There would be some costs to deposit takers and to the FSCS to implement these proposals,” said the BoE’s Prudential Regulation Authority, which supervises UK banks and insurers. But it added that “the costs would be outweighed by the benefits”.
The BoE also confirmed an earlier proposal that would give it powers to draw on the FSCS deposit guarantee fund to recapitalise smaller lenders that fail and cover their operating costs while they are sold or transferred to a “bridge” bank — a temporary entity set up by the BoE to manage their operations.
The proposal, which was made by the Treasury in response to SVB’s collapse, is designed to allow a failing lender to operate as normal through its difficulties and to allow depositors to access their funds as usual rather than having to wait for a refund.
When SVB collapsed, the BoE was forced to warn its UK customers they faced a week-long wait for refunds of their £6.7bn in deposits at the British arm of the bank, and about a third could have lost their money altogether. A crisis was ultimately avoided after HSBC stepped in almost immediately to rescue the UK business over one weekend.
The UK deposit guarantee scheme has been increased several times since it was created in 2001, with an initial deposit protection limit of £31,700. The last time the limit was increased was from £75,000 to £85,000 in 2017.
The BoE said the six months of extra protection for people who have a sudden influx of funds, due to an event such as an inheritance, house sale or life insurance payout, would increase from £1mn to £1.4mn.
Before the UK left the EU, it was required to keep its deposit protection equal to €100,000. The increased protection for UK bank depositors takes them closer to the US, where deposits are guaranteed up to $250,000.
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