The government must build on Brexit freedoms by giving businesses greater deposit protection as unrest in the banking sector worsens, MPs and businesses have demanded.
Efforts to stem a crisis of confidence in the financial system failed to calm nerves, with bank stocks falling sharply again on Friday, led by German giant Deutsche Bank.
The turmoil was sparked a fortnight ago when Silicon Valley Bank (SVB), a mid-sized lender in the United States, collapsed after a sudden run on the bank.
Its UK branch has also seen depositors rush to withdraw cash – and the Bank of England revealed last week that almost £3billion was withdrawn from SVB UK on March 10 alone, it said. leaving £6.7bn before HSBC came to the rescue and bought it for the token price of £1.
Basically, thousands of SVB UK customers – many of them tech start-ups – had uninsured deposits, meaning until HSBC stepped in they were at risk of losing anything over the £85,000 protected by the Financial Services Compensation Scheme (FSCS).
Waving the flag: Government must capitalize on Brexit freedoms by giving businesses greater deposit protection as unrest in the banking sector deepens
Will Wragg, co-chair of the cross-party parliamentary group on fair banking, said: “The Silicon Valley Bank UK fiasco revealed that many companies were exceeding their deposit protection limits.
“This is a source of serious concern that could be existential for thousands of small and medium-sized enterprises (SMEs),” he added, referring to companies that often hold large cash reserves.
“The fact that this is clearly so widespread suggests to me that the cap needs to be revisited, if we are to protect bank deposits of SMEs in particular,” Wragg said. “The current situation is just a remnant of the EU’s own threshold. Why not take advantage of our new freedoms? »
The guarantee of compensation of up to £85,000 in the event of bank failure, or £170,000 for joint accounts, was adopted under EU law in 2010. The maximum guaranteed deposit is still €100,000 (£88,000) in the EU, but $250,000 (£204,500) in the US.
Sir Philip Hampton, former chairman of bailed-out bank RBS – now NatWest – said the deposit guarantee scheme was there ‘because it keeps people from worrying’. He added: “What nobody ever wants to happen is to see it really tested.”
But he accepted that if, in the “highly unlikely” case of a major bank, the government should step in and insure the deposits, as has happened in the United States.
“A government that lets millions of people lose money in bank deposits is going to be pretty unpopular,” Hampton added.
If the limit had kept pace with prices, it would be nearly two-thirds higher at around £140,000, according to the Federation of Small Businesses (FSB).
Protection in the UK covers personal and corporate bank deposits and is paid for by a levy that lenders, insurers and other finance companies pay to the FSCS. The FSB’s Tony Baron said there were “strong arguments” for increasing the level of depositor protection when its real value has been eroded by inflation.
“But even if it were to rise to £125,000, it would still leave many businesses vulnerable if another bank the size of SVB UK failed.”
Hampton’s view was echoed by Lord Tyrie, former chairman of the Banking Standards Commission, who said: “The higher you raise the limit, the more moral hazard you create”, rewarding reckless behavior.
“The lower the limit, the higher the risk of exodus from the mass market. It’s a compromise.
Only 4.6% of SVB UK’s deposits were insured by the FSCS.
Bank of England Governor Andrew Bailey faces questions from MPs on SVB UK this week.
In a letter to Treasury Select Committee Chair Harriett Baldwin, Bailey said: ‘The UK deposit guarantee limit is set at a level which balances financial stability, moral hazard and adequate protection depositors.”
The Financial Conduct Authority, which sets the bank’s Prudential Regulation Authority deposit limit, declined to comment.
But companies are urged not to keep all their eggs in one basket, even if their bank is safe. “Companies could experience problems paying salaries and other bills for reasons other than bank failure,” the FSB baron said.
“We have seen instances where due to technical software failures in a bank’s internal system, customers were unable to access their funds in a timely manner,” he warned.
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