Bank of England Governor Andrew Bailey said the UK’s deposit insurance scheme is not working properly and needs to be reformed.
The scheme, which protects deposits of up to £85,000 for all customers at the bank, needs improvement and is currently under review, Mr Bailey added.
“The bank is also considering improving our approach to depositor withdrawals for smaller banks that have unsustainable liabilities. [protections].
“Until now, our work has focused on payout speed. If we go further and consider increasing deposit insurance limits, this could have financial implications for the banking sector as a whole.
“As with everything banking, there is no free lunch.”
Several smaller UK banks have warned ministers that increasing the total reserves banks must hold to better protect customers in the event of a crisis will prevent them from offering mortgage-seeking people or businesses looking for credit to borrow billions.
Mr Bailey emphasized that the UK banking system is sound. “Today, I don’t think we are facing a systemic banking crisis,” he said.
“When I look at UK banks, they are well capitalized, liquid and capable of serving their customers and supporting the economy.”
Speaking in Washington, DC, Mr. Bailey said that banking reforms since the 2007-2008 financial crisis had been successful, but that raises the question of whether banks should have larger cash reserves in case future crises.
Bailey said the collapse of Silicon Valley Bank and two other US lenders, and last month’s forced UBS takeover of Credit Suisse, show that modern technology is allowing the traditional bank to operate much faster and deeper.
“This should raise the question of what are the appropriate and desirable liquidity buffers that create the time needed to take action to resolve the issue. We cannot assume that the current answer about the total amount of liquidity protection is correct,” he said.
“We saw at Silicon Valley Bank that with the technology we have today—both in terms of connectivity and bank account access speed—transactions can be done much faster.”
Source: I News
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