Have the recent bank failures pressured the FCSC?

The Financial Services Compensation Scheme (FSCS) compensation limit for bank deposits could be increasing soon.

An easy question to start: How much each of individual’s deposits with an authorised deposit-taking institution are covered by the FSCS?

A. £50,000

B. £75,000

C. £85,000

D. €100,000

All the answers were correct at one time, but for now £85,000 applies.

Now a slightly more difficult question: When was the limit last increased?

A. 1 October 2008

B. 1 January 2010

C. 1 June 2012

D. 30 January 2017

The answer here is D. However, that increase was arguably no such thing. At the time the UK was still a member of the EU and therefore subject to a €100,000 limit under the European Deposit Guarantee Scheme Directive. Back in December 2010 the FSCS limit had been set under the same Directive at £85,000 to reflect the then €/£ exchange rate. Just over four years later, the limit was cut to £75,000 because of sterling’s relative strength. After the Brexit vote weakened the pound, the limit was restored to £85,000 in January 2017. Thus, it is arguable that today’s FSCS deposit limit is unchanged from its level of over 12 years ago. Had it been index-linked to the CPI since December 2010, it would now be around £120,000.

Last week both the Governor of the Bank of England and the Chancellor spoke about the potential need to raise the deposit protection limit, although neither hinted at a new figure. The driver for their comments was a lesson learned from the demise of SVB. The US equivalent of the FSCS, the Federal Deposit Insurance Corporation (FDIC) offers $250,000 (about £200,000) protection, but as SVB crashed the FDIC was forced to say it would give full protection to all SVB’s depositors. In part this reflected SVB’s unusual deposit base, 93.8% of which was uninsured according to S&P.

Those exposed depositors, many in the Silicon Valley venture capital community, were able to withdraw their funds rapidly once worries about SVB started circulating. The speed at which both fright and flight spread explain the musings of Messrs. Bailey and Hunt. The UK’s last experience of a bank run was Northern Rock, back in 2007. In the sixteen years since, the world of banking and communication has changed enormously. A UK bank run today would be instant news and the queues outside (any remaining) branches would be replaced by a deluge of mouse clicks. Everything would happen that much faster and the bank’s coffers would drain that much quicker.

In theory, the higher the depositor protection, the smaller would be the withdrawals and the greater the chance of bank survival, even if that meant a weekend shotgun takeover (see HSBC and SVB UK or UBS and Credit Suisse). The downside is that deposit insurance is not free and somebody (the banks and ultimately their customers) must pay for it.

Raising the limit would also have other consequences, such as bringing more deposits to smaller banks, imposing greater reserve requirements on all banks and reducing the relative appeal of National Savings & Investment (which is 100% government-backed). As history shows, so far the UK banks have been successful in constraining FSCS cap rises. 

This information is correct as at 16/05/2023.