BoE governor Andrew Bailey yesterday signalled a review of UK bank deposit insurance. He was speaking in Washington just weeks after criticising US handling of recent banking turmoil.

He questioned the rule that established a clear dividing line between deposits that are guaranteed and those that are not, saying: “Practice, I would suggest, points to the difficulty of this principle.”

He told his audience at the Institute of International Finance that the UK might need to increase the limit for guaranteed deposits above the current £85,000 ($106,000) – a level far lower than the US mark of $250,000.

Bailey questioned whether the current scheme and limit worked as intended for smaller banks, especially in an age of electronic transfers and rapid bank runs. Alongside consideration of whether the current limit gave savers sufficient reassurance, he said the Bank was also looking at how to increase the speed of payouts.

No free lunch

But he warned increasing the deposit insurance limit would come at a cost, saying “as with all things relating to bank resolution, there is no free lunch”.

Rob Mason, head of regulatory Intelligence at Global Relay (our parent company) said: “Perhaps the bigger area for review is where larger banks maintain eligible liability margins, for example another layer of capital which acts as insurance from losses, which smaller banks are not required to maintain”.

And, he added: “A review of bank deposit insurance and other mechanisms to slow down the stampede of withdrawals which smaller banking entities like SVB suffered was mentioned in our recent webinar. Present levels of government backed guarantees are at £85,000 in the UK, which does seem anomalous to the $250,000 in the US.”

Bailey also said: “Today I do not believe we face a systemic banking crisis,” adding: “What we have not done — and should not do — is in any sense aim off our preferred setting of monetary policy because of financial instability.”

Moral hazard

He had previously been critical of the way US authorities responded to recent market turmoil, warning in a letter to UK MPs that a blanket guarantee of bank deposits was a “moral hazard” and that the consequences of US action could have a detrimental impact internationally. Ultimately, he said, the taxpayer would bear the brunt of costs.

In that letter, he had stated: “The UK deposit guarantee limit is set at a level which balances financial stability, moral hazard and adequate depositor protection.”