One of the architects of Britain's financial regulation has called for higher capital charges on banks as a "quid pro quo" if the government decides to strengthen deposit guarantees
John Vickers, who led the commission that designed ring-fencing to protect retail customers over a decade ago, said shielding more client money from bank failures would ultimately expose taxpayers to more risk.
"If the state is more on the hook, the quid pro quo is that there has to be a lower risk of insolvency and the only sure way of achieving that is more common equity capital," Vickers said in an interview.
The Bank of England and the government are considering changes to the Financial Services Compensation Scheme, including raising the ceiling on protected deposits from £85,000 ($105,140) per person per bank. Depositor protection is paid upfront by the state and recovered from lenders.
Carving out threshold exemptions for businesses' working capital are being considered, too. Officials also want to speed up access to insured deposits from the current wait of at least a week, which could require the banks to fund the compensation pool upfront, as they do in other jurisdictions such as the European Union and the U.S.
Any demand for more capital risks infuriating the banks, which have argued it could reduce lending, slow economic growth and weaken the U.K.'s position as a leading financial center. Regulators claim a safer financial system improves competitiveness.
Speaking with Bloomberg TV, Andrew Griffith, economic secretary to the Treasury, said he and his officials were "working with the Bank to constantly look at whether you've got the right threshold and the right scope."
Shortcomings in the current framework were highlighted by the failure of Silicon Valley Bank U.K.,
Vickers said these interventions, along with Switzerland's role in the rescue of Credit Suisse Group AG days later, revealed flaws in bank resolution regimes. "Given what's happened, there are major questions about whether resolution regimes can work," said Vickers, a former BOE chief economist.
The specific U.K. issue related to business continuity, as SVB's U.K. customers would have been unable to pay staff or suppliers if the bank had been put into the BOE's insolvency regime. The BOE has said depositors would probably have got all their money back under insolvency but they would have had to wait a week to get the first £85,000 and months for the rest.
The BOE is looking at raising the deposit cap, which is in line with the €100,000 ($109,240) guarantee in the EU but below the $250,000 in the U.S. And some elements of the U.K. program are antiquated. The FSCS makes payments by cheque, which is no good for small business customers that often bank with just one provider.
Day-to-day cash needs for payroll and suppliers can also go beyond the limit. One way around this would be to treat businesses' working capital like the temporary cash from a house sale, bringing this money within the deposit insurance program.
However, Vickers said he was "skeptical" about extending protection in this way. "It is difficult to see where you can draw the line. It would take us closer to wider deposit guarantees. Every large depositor would need to know which side of the line which of their deposits were on."
Andrew Tyrie, a former chairman of the Treasury select committee, said the deposit insurance scheme "is a tax on well-run banks and a substantial increase in the cover takes a lot of justifying. Pre-funded schemes are inherently less efficient."
