Speaking at this year’s British Bankers Association Conference in London, Bank of England deputy governor Paul Tucker called on the banking sector to consider a risk-based and pre-funded insurance scheme to cover all retail deposits.
Tucker said: “It is no longer really about protecting depositors, as the vast majority are wholly protected by the current insurance scheme. From a micro perspective, it is essentially about minimising risks to, and losses at, the deposit insurer, the UK Financial Services Compensation Scheme.”
Tucker said that with a pre-funded, risk leveraged fund like one that is currently being trialled in the US, institutions could offer products in line with their cover.
He said: “In a system of risk-based premia, levies on ‘safe’ banks would obviously be lower than those on their riskier peers. In a system of variable capital requirements, the burden on the FSCS and the levies of surviving ‘safe’ banks should crystallise less frequently, and perhaps also be smaller, the greater the amount of capital a riskier, failed bank had to carry.”
The deputy governor also said that a fund of this kind could also help in preventing liquidation under the deposit insurance scheme.
Tucker said for a successful system to work, banks must constantly update the FSCS as to their situation so to help a speedy recovery of retail deposits: “Rapid payout is necessary to maintain the confidence of depositors in other banks. It’s all very well most retail depositors being 100 per cent protected, but not so comforting if they had to wait ages to receive repayment from the deposit insurer after their bank had failed.”