The UK’s banking industry expresses concerns that proposed changes to the Financial Services Compensation Scheme, via deposit-scheme reforms, might adversely affect borrowers in need, reports the Financial Times.
Reforms to the UK’s deposit insurance scheme could impose an “additional tax” on lenders, potentially impacting their capacity to extend loans to households and businesses in need, according to the Building Societies Association (BSA).
The Bank of England is exploring an overhaul of the Financial Services Compensation Scheme, which may involve pre-funding the system to ensure immediate access to funds for depositors of failed banks.
This proposal comes in response to the collapse of Silicon Valley Bank in March, which led the Bank of England to inform the lender’s UK customers of a possible seven-day wait for their guaranteed deposits in case of collapse.
While policymakers believe strengthening the system could protect banks and building societies from future deposit runs, Robin Fieth, CEO of the Building Societies Association, argues that pre-funding the system could have detrimental consequences.
Pre-Funding Concerns
Fieth questions the necessity of setting aside more capital for a pre-funded failure pot fund, which could divert resources from growth.
He believes the current scheme works well and prefers to continue supporting the mortgage market. Fieth also suggests that any levy should reflect the type of deposits institutions hold.
The BSA would oppose contributing additional funds for small and medium-sized businesses, as their members do not hold large deposits from this sector.
Potential Design and Impact of the Revised Scheme
The Bank of England has not yet released details about the revised scheme, which is anticipated to raise the current £85,000 limit covering deposits to levels similar to the $250,000 for the pre-funded US system.
Eamonn White, a former Bank of England official who now advises the IMF and others on deposit guarantee schemes and policies dealing with failing banks, estimates that the central bank could pre-fund the scheme with £30bn to £60bn.
This funding would allow the Bank of England to cover payouts for two to four small banks simultaneously, as recommended by the IMF’s financial sector assessment of the UK last year.
White suggests that fully funding the scheme could take between five and ten years, implying an annual levy of £6bn to £12bn on UK banks and building societies, which would likely all be required to contribute since they all benefit from a stable banking sector.
Experts believe it is unlikely to affect overall UK lending due to the size of the market, despite burdening some specific institutions.
UK Lending Market and Growing Disparity in Savings
Bank of England data reveals that the UK lending market comprised £1.8tn of loans to individuals, £200bn of loans to small businesses, and nearly £340bn of loans to larger companies as of February.
The Bank of England’s Financial Policy Committee, which assesses market-wide risks, reported that banks were not reducing lending to preserve capital but were tightening lending due to concerns about customers’ ability to repay loans in a deteriorating economy.
Fieth also highlights a growing disparity in household savings. Although the overall balance for household deposits increased by almost £6bn in February to £1.9tn following an expected post-Christmas decline, he notes that the stratification seems to be worsening.
Fieth points out that there are “haves” at one end and “have nots” at the other, with additional stress likely in the middle due to higher inflation.
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