Bank deposit protection set to rise?

The recent problems in the banking world have raised questions around the current maximum protection for bank deposits: is it overdue for an increase?

The figure of £85,000 is one you might have regularly seen in articles (or some adverts) about bank deposits. It is the maximum deposit value in an authorised deposit-taking institution that is covered by the Financial Service Compensation Scheme (FSCS). If the deposit is in joint names, the £85,000 is doubled. However, there is a trap to watch out for – more than one bank may operate under the same banking license. For example, the Halifax’s license also covers the Bank of Scotland, Birmingham Midshires and St James Place Bank.

With the recent problems in the banking world, such as the demise of Silicon Valley Bank in the US and Credit Suisse’s forced marriage to its Swiss rival, UBS, attention has been turning again to that £85,000 compensation figure. It was last revised in January 2017, when it was increased from £75,000. The limit had also been £85,000 between December 2010 and July 2015 before being cut under EU deposit protection rules, which set the limit at the sterling equivalent of €100,000 (the pound was stronger in those pre-Brexit days).

If the limit had been index-linked since it was first set at £85,000, it would now be around £120,000. Both the Chancellor and the Governor of the Bank of England recently suggested that the FSCS limit should be raised, but not because inflation had cut its value by almost a 30%. Their concern was more that the UK’s last experience of a bank run – queues outside Northern Rock in 2007 – reflected a different era.

If there were a Northern Rock Mk II crisis today, the news would be all over social media instantly and there would be no queues outside (any surviving) branches because all the customers would be withdrawing their deposits by phone, tablet or computer. Money would drain away much quicker than it did 16 years ago.

The logic behind the call for a higher level of deposit protection is that it would mean a smaller number of depositors anxious to withdraw their money. Stemming the outflow is crucial to keeping a bank alive.

What neither the Chancellor nor Governor mentioned was the wisdom of having £85,000-plus in deposit at a time when inflation is so much higher than the rate of interest available.

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