Comment on the potential reform of the deposit guarantee scheme being considered by the Bank of England

Peter Rothwell, Head of Banking at KPMG in the UK, comments on the potential reform of the deposit guarantee scheme being considered by the Bank of England:

“Recent events have shown that digital banking can trigger deposit runs that are quicker than ever before and social media only exacerbates this risk*. During a crisis customers may deem the “too big to fail” banks as lower risk than smaller banks and start-ups and move money accordingly.

“In this context, traditional measures such as increasing liquidity buffers may not work – they buy hours at best. Instead, actions to reduce the speed that customers move money are critical. Raising the Financial Services Compensation Scheme (FSCS) threshold and increasing the extent to which it is pre-funded could mitigate some of this risk and measures are being considered.

“Addressing the risks posed by social media needs a different approach. It requires an effective communications strategy that can be implemented quickly and is responsive to fast moving events.

“Regulators will therefore need to carefully consider the extent to which increased liquidity buffers and deposit guarantees reduce the risk and at what potential cost to the economy. It is all about balance.”

ENDS

Notes to editors:

*Digital banking increases the potential speed of deposits, while social media can act as both the trigger for a run and a transmission mechanism.

Monetary and financial stability: lessons from recent times - speech by Andrew Bailey | Bank of England

 

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