British Banks May Face New Deposit Insurance Funding Requirements to Replace Enfeebled Levy System

Posted 06/11/2008 - 03:22 by VikingRaider

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2008-11-06 08

Economics and business minister Ian Pearson told MPs yesterday: "At a different time we would believe in pre-funding, but it's not the case at the moment that it's right to go down this route."

Given the current difficulties facing the banks, the Government has chosen to continue with the scheme in its current form – a pay-as-you-go annual levy on the industry of no more than £4bn.

However, Mr Pearson added: "The Government will want to make a decision in conjunction with the Financial Services Authority and the Bank of England about when the circumstances are appropriate to pre-fund."

Until now, the Government has backed away from endorsing pre-funding. Draft legislation on banking reform will include powers to introduce it only "if considered appropriate in the future". A provisional code of practice is due to be published next Thursday.

Bank of England Governor Mervyn King has accused the Treasury of being "rather short-sighted" by sparing Britain's lenders the cost of pre-funding. He believes a cash pot is necessary, with lenders making "non-negligble contributions so that over 10 years [the scheme] would build up a fund of several billions [of pounds]".

In the case of Bradford & Bingley, the Government provided the Financial Services Compensation Scheme – which operates the savings scheme – an £18bn loan to take responsibility for the bank's savings. The guarantee was recently increased from £35,00 to £50,000 and the Government will consult on raising it again to £100,000 next year.

Separately, FSA chief executive Hector Sants said that bonuses, like liquidity and capital requirements, will need to be re-examined on an international basis following the financial crisis. "It's surprising how many banks have a relatively risky structure in terms of incentivising individuals," he said at a conference in London.