The governor of the Bank of England announced last April a review of the British deposit guarantee scheme.
A review was already under way to expedite the compensation of depositors in the event of bankruptcy.
This new review follows the banking turmoil last March, which involved depositors residing in the United Kingdom through SVB UK subsidiary. One reform envisaged would be to raise the deposit guarantee limit, which currently stands at £85,000 per depositor. This would ensure stable and inexpensive resources for smaller institutions, whose access to market refinancing is more difficult than for larger banks.
However, the increase in the deposit guarantee limit raises the question of its funding. As it stands, the UK deposit guarantee fund has limited resources, which are calculated on an annual basis based in particular on depositors' compensation forecasts. In the event that the total compensation paid exceeds the available capital, the fund may call on additional levies from banks within a legal annual limit, or borrow from the private sector or the government, reimbursed ex post by additional levies on the banking industry.
Raising the deposit guarantee limit would mechanically increase the amount of banks' contributions, which would certainly be beneficial for the compensation of depositors, but it would also have the effect of transferring ex ante - via banks' contributions - own funds, which could have been used to finance the economy, to the guarantee fund.
More recently, the Financial Times reported that a broader reform of the UK's resolution and deposit guarantee regime could be considered. In order to avoid the risk of a deposit race and to allow for an orderly resolution of bank failures, the fund could provide equity to insolvent banks so that they retain access to emergency loans from the Bank of England. But for the time being, no official statement has come to support this avenue of reform.
