Academics comment as Bank of England considers overhaul of deposit guarantee scheme

Following media reports that the Bank of England is considering a major overhaul of its deposit guarantee scheme, academics from Bayes Business School have offered the following comments

Dr Francesc Rodriguez Tous, Lecturer in Banking at Bayes Business School, previously worked at the Bank of England, Deutsche Bundesbank, and Banco de España. His research has a particular focus on banking regulation and systemic risk.

Dr Rodriguez Tous said:

“The main goal of deposit insurance is to prevent bank runs – situations where many depositors try to withdraw their money at the same time. Some of the changes that the Bank of England mentions go in this particular direction. For instance, lowering the time it takes for depositors to access their money when a bank fails will make it less likely that they run in the first place. This is also true for increasing the threshold beyond £85,000, or setting up a better scheme for small and medium enterprises (SMEs).

“All these changes are also relevant given technology is making it easier to withdraw funds from your bank account; in other words, it is making it easier to run.

“Finally, as it is being discussed, it is important that banks themselves finance this scheme, otherwise it would provide distorted incentives – I can take risks and I do not finance the insurance – and exacerbate the view that when banks make mistakes the taxpayer has to foot the bill.”

Following the publication of the above comments, Dr Rodriguez Tous was asked to write for The Times on the same topic. 

Dr Sotiris Staikouras, Senior Lecturer in Banking & Finance, specialises in banking, financial intermediation, asset pricing for banks and insurance, financial conglomerates, interest rate risk exposure of financial institutions, bank-insurance interface, stock market volatility and financial modelling.

Dr Staikouras said:

“Although our financial system is stable and protected with adequate liquidity, banks are (inherently) susceptible to various risk exposures due to their transformation function.

“It’s worth emphasising that liquidity is in the DNA of any sustainable banking system – this is what banks are meant to provide. Remember that the Bank of International Settlements (BIS) is more concerned with small business finance and economic growth. This is probably the most persuasive argument to regulators and depositors alike.

“The recent move by the BoE comes a result of the recent isolated banking crises and a tendency to align banking practices with the ‘modern’ status quo in financial markets. This move also has a three-fold scope by a) injecting a balming effect into the wider current fiscal challenge that UK faces (this has more of a behavioural element), b) providing a reassurance for the SME (see BIS above) and c) forcing banks to have a fairer stand across their lenders via a more generous pre-funding. The last of the three will result in reduced procyclicality in the financial system, while aiming to avoid collecting levies on an ex-post basis, i.e., when banks fail.

At the same time, insurance funds will be used to avoid liquidation, given the Special Resolution Regime (SRR) is deployed if/when needed – this assumes that SRR has enough information in place. With that in place, the aim is to make a more stable banking sector, avoid bringing politics into bank rescues and, of course, forcing banks to honour their social contract.”

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