In case of a bank failure, British depositors will have an easier time withdrawing their money.
The Bank of England (BOE) announced Monday it has proposed a series of sweeping reforms in order to make the British financial system safer. The United Kingdom central bank will protect deposits of up to £1 million ($1.56 million) for up to six months to avoid chaotic runs that have been seen before.
At the present time, savings up to £85,000 ($135,875) are guaranteed by the Financial Services Compensation Scheme (FSCS), if banks should experience significant difficulty akin to the economic crisis a few years ago. This means that, according to the London Guardian, depositors would have to separate their savings in up to £85,000 to protect their money.
Proposals would protect funds in an account because the client is purchasing a home; pay-outs from unemployment pay, divorce settlements, life insurance and retirement; and compensation from wrongful conviction and criminal injuries.
Furthermore, customers will have their money automatically transferred to another bank if their initial institution failed under the new proposed schemes. BOE Deputy Governor Andrew Bailey referred to these suggestions as ways to diminish shocks to both consumers and the overall economy.
“Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis. Ring-fencing will improve banks’ resilience, by protecting them from shocks, and facilitate orderly resolution – both of which are needed for a stable financial system,” said Bailey in a statement. “These proposals will allow customers to have continuous access to the money in their bank account – or receive payment from the FSCS if this is not possible. Additionally, the increase in FSCS limits for certain types of insurance will mean policyholders who may find it difficult to obtain alternative cover, or who are locked into a product, have greater protection if their insurer fails.”
The BOE noted that banks will have three months to submit preliminary plans because changes will come into full effect sometime in 2019. It should be noted that the central bank did not confirm how banks should address these matters, such as if it should maintain a certain amount of capital or if leverage ratios would be adjusted.
Following in the Fed’s footsteps
Last month, we reported the Federal Reserve outlined a number of proposals that would circumvent massive financial firms from failing, which would also protect consumers. The Fed proposed special capital requirements that would be a lot higher than what was initially agreed to under international banking regulations. The method in performing this measure would be for the United States central bank to institute a capital surcharge that will help banks maintain a wider cushion of capital.
The Fed also confirmed that it would penalize domestic banks that rely on unstable forms of short-term funding in figuring out the size of the capital surcharge. Therefore, it still is unknown how much capital banks will need – it is estimated that the surcharge would be 2.5 percent of risk-weighted assets.
Critics of this initiative argue that banks have already been doing this since the financial collapse. Data from the Federal Financial Analytics shows six U.S. financial institutions have heightened their capital by approximately $29 billion between 2007 and 2013.
Republicans and Democrats support the Fed’s proposals saying the matter of too big to fail is a bipartisan issue that needs to be resolved by Washington lawmakers and the minds at the Fed.
