Plans to increase deposit protection
The government plans to raise the maximum compensation for victims of bank failures to 50,000 pounds but banks will not have to pay money upfront into the deposit protection scheme, the Treasury said on Tuesday.
In a consultation document on reforming the banking system in the wake of last year’s run on mortgage lender Northern Rock, the Treasury concluded it would be wrong for banks to pay more money when they are rebuilding their capital positions.
The paper proposed as the lead option an increase in the compensation limit for protected deposits to 50,000 pounds, on a per person per bank basis.
“The Financial Services Authority (FSA) will explore with the financial sector ways for customers to cover amounts above the compensation limit and the appropriate coverage for client accounts and similar arrangements,” the Treasury said.
The 50,000 pound limit was expected but banks, who have been worried by the prospect they might have to pay billions of pounds into the scheme when their balance sheets are under strain because of the global credit crunch, will be relieved to hear there are no upfront costs.
The Treasury is keeping open the option of a pre-funded scheme in the future. The United States requires its industry to have such a compensation scheme.
The British Bankers’ Association said no pre-funding was needed. “What we want is a system that works, that intervenes quickly, that frees deposits when necessary and has the ability to top up as and when required. None of that requires a pre-fund,” said Angela Knight, chief executive of the lobby group.
Under the plans which could come into effect later this year, savers will have up to 50,000 pounds of their deposits protected in the event of a bank failing.
The previous limit was 35,000 pounds. That was raised from 31,700 in October last year following widespread concern about consumer protection after news of the troubles at Northern Rock sparked Britain’s first major bank run in more than a century.
Knight said the current limit of 35,000 pounds covers about 96 percent of all depositors. Increasing it to 50,000 might only get another 1 percent, so it is not a huge change.
“We are happy to discuss the alternative limits with the Treasury, but 96 percent of depositors are covered right now,” she said.
NEW BOE REMIT
The Bank of England will also be given a new statutory remit to protect financial stability under the proposed reforms and will be given new powers to enable it to discharge this responsibility.
As Chancellor Alistair Darling announced last month, the government wants to create a Financial Stability Committee to support Bank Governor Mervyn King which would draw on external expertise.
The Bank’s Court would also get a formal role in overseeing the Bank’s performance on financial stability.
Legislation is planned to require the central bank to consult with the Treasury, on a periodic basis, when setting the detailed financial stability objectives and the remit for the FSC.
The Bank will also be given a new statutory remit to protect financial stability under the proposed reforms.
Source: Reuters