UK weighs reform of uninsured bank deposits after SVB collapse

THE UK Treasury and Bank of England (BOE) are considering reforms that would give uninsured depositors immediate access to their cash in the event of a bank failure, a move that could put taxpayers on the hook. Authorities are looking into whether a portion of the money could be released upfront to help ensure business continuity for customers, according to government officials familiar with the matter. That would involve an assessment of how much cash uninsured depositors were likely to recover, they said. In the first instance, the funds would be covered by the taxpayer and clawed back as assets get sold. Deliberations are at an early stage as a number of options on deposit insurance reform are being considered, the people said, asking not to be identified discussing private matters. Representatives for the Treasury and BOE declined to comment. Regulators around the world have been examining ways to deal with bank runs ever since the collapse of Silicon Valley Bank and a couple of other US regional lenders in March. In the UK, discussions on how to fix flaws in the resolution regime have been underway as well. BOE governor Andrew Bailey this month said the turmoil revealed shortcomings in the depositor protection programme. He also said UK banks are well capitalised and liquid. The potential UK reform under discussion is part of wider efforts to speed up payouts to customers when a bank is placed into resolution. Even insured depositors currently have to wait a week to get their money. The BOE wants to shorten the delay to hours, the people said. Although SVB’s UK unit was rescued without complications – armed with a special exemption, HSBC Holdings bought the business for £1 (S$1.7) on Mar 13 – it exposed deficiencies in the current framework around the issue of business continuity for customers. All but £155 million (S$258 million) of SVB UK’s £6.7 billion deposits were uninsured when the BOE took control of it in early March. Had regulators pressed ahead with their initial plan to throw the bank into an insolvency, those deposits would have been frozen for months until assets were sold and recoveries made, proving ruinous for many customers. Unlike in the US where a standard US$250,000 of deposits are insured, only about £85,000 is insured in the UK. The BOE is considering an overhaul of its deposit guarantee scheme and one proposal is to raise the covered amount and force banks to pre-fund the system to a greater extent to speed up payouts, the Financial Times reported this month. In the UK, claims under the deposit insurance programme are first met by the state. In the US, however, regulators took US$19.2 billion from the Deposit Insurance Fund, a pre-funded industry pot, to cover uninsured deposits after the failure of SVB and smaller banks. BLOOMBERG