Bank of England 'considering compensation scheme changes to reduce bank run risks'

The Government ultimately brokered a deal to sell SVB UK to HSBC for £1 rather than it going bankrupt and locking clients out of their accounts.

The newspaper reported that “people briefed on the BoE’s thinking” say “regulators are concerned that the guarantee’s current £85,000 limit covers only about two-thirds of deposits and that the relatively low level of pre-funding means there is a delay of at least a week for customers to regain access to their cash”. It means there is concern the situation has undermined confidence in the compensation scheme and therefore reduced its usefulness in preventing bank runs.

One potential solution is reported to be boosting the level of pre-funding for the scheme – a move opposed by lenders on cost grounds.

The Bank of England refused to comment on the report but last week Governor Andrew Bailey told the Institute of International Finance: “We saw with Silicon Valley Bank that with the technology we have today – both in terms of communication and speed of access to bank account – runs can go further much more quickly. This must beg the question of what are appropriate and desired liquidity buffers that create the time needed to take action to solve the problem.”

He later added in his speech the BoE is considering some changes to its deposit insurance system following a similar announcement in America.

But he added that some changes could prove costly for banks. Mr Bailey said: “The US authorities have announced a review of their deposit insurance system. In the UK, the Bank is also considering improvements to our approach to depositor pay-outs for smaller banks which do not have Eligible Liabilities.

"Our work has thus far focused on the speed of pay-outs. Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole. As with all things relating to bank resolution, there is no free lunch.”

He added: “We will need to revisit the protection of inside money in the form of deposits, especially in smaller banks.”

Chancellor Jeremy Hunt also told the Financial Times last week that reform of the current compensation system should be considered.

He said: “We need to look at deposit insurance and keep that under review. If there is a decision [from regulators] that we should increase [the £85,000 limit], it will come across my desk as to how we finance that increase.”

Mr Hunt said: “The thing that was most noticeable about SVB was the speed at which deposits were transferred. Word gets round on social media. And so we need to make sure we are constantly updating our stress testing to deal with situations that might occur.”

He added: “I’m very confident that, notwithstanding the speed that deposits can move, we have a very resilient banking sector.”