Use Brexit freedoms to cover UK deposits

The Government must take advantage of Brexit freedoms by giving companies more deposit protection as turmoil in the banking sector deepens, MPs and businesses have demanded.

Efforts to stem a crisis of confidence in the financial system have failed to calm nerves, with bank shares 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 US, collapsed after a sudden run on the bank.

Its UK subsidiary also saw depositors rush to withdraw cash – and the Bank of England last week revealed that nearly £3 billion was pulled from SVB UK on March 10 alone, leaving it with £6.7 billion before HSBC rode to the rescue and bought it for the token price of £1.

Crucially, thousands of SVB UK customers – many of them tech start-ups – had uninsured deposits, meaning until HSBC stepped in, they risked losing everything above the £85,000 that is safeguarded under the Financial Services Compensation Scheme (FSCS).

Flying the flag: The Government must take advantage of Brexit freedoms by giving companies more deposit protection as turmoil in the banking sector deepens

Will Wragg, co-chair of the cross-party parliamentary group on fair business banking, said: ‘The Silicon Valley Bank UK fiasco has revealed that numerous companies were exceeding their deposit protection limits.

‘This is a cause for serious concern which could be existential for thousands of small and medium-sized enterprises (SMEs),’ he added, referring to businesses which often hold large cash reserves.

‘The fact that this was clearly so widespread suggests to me that the cap needs to be reviewed, if we are to safeguard SME bank deposits in particular,’ Wragg said. ‘The current state of affairs is just a hangover from the EU’s own threshold. Why not take advantage of our new-found freedoms?’

The guarantee of up to £85,000 compensation in the event of a bank failure, or £170,000 for joint accounts, was adopted under EU law in 2010. The maximum deposit guaranteed is still €100,000 (£88,000) in the EU but $250,000 (£204,500) in the US.

Sir Philip Hampton, former chair of bailed-out bank RBS – now NatWest – said the deposit guarantee scheme was there ‘because it stops people worrying’. He added: ‘What nobody ever wants to happen is to see it really tested.’

But he accepted that if, in the ‘highly unlikely’ event a major bank went under, the Government would have to step in and insure deposits, as has happened in the US.

‘A Government letting 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, says the Federation of Small Business (FSB).

Protection in the UK covers both individual and company bank deposits and is paid for by a levy that lenders, insurers and other finance firms pay to the FSCS. The FSB’s Tony Baron said there was ‘a strong case’ for increasing the level of depositor protection when its real value has been eroded by inflation.

‘But even if it were to increase to say £125,000, it would still leave many companies vulnerable if another bank the size of SVB UK were to fail.’

Hampton’s view was echoed by Lord Tyrie, former chair of the Banking Standards Commission, who said: ‘The higher you raise the limit, the more you create moral hazard’, rewarding reckless behaviour.

‘The lower the limit, the higher the risk of mass market exodus. It’s a trade-off.’

Only 4.6 per cent of SVB UK’s deposits were insured by the FSCS.

Bank of England Governor Andrew Bailey this week faces MPs’ questions over SVB UK.

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 depositor protection.’

The Financial Conduct Authority, which sets the deposit limit with the Bank’s Prudential Regulation Authority, declined to comment.

But firms are being urged against keeping all their eggs in one basket, even if their bank is safe. ‘Companies could face problems paying their wage and other bills for reasons other than bank failure,’ said the FSB’s Baron.

‘We have seen cases where, because of technical software failures in a bank’s internal system, customers have not been able to access their funds on a timely basis,’ he warned.