'Narrow banks' are way forward, says Mervyn KingBank of England governor wants deposit protection

25 February 2010

Mervyn King

Mervyn King, governor of the Bank of England, today told the Future of Banking Commission that consumer deposit accounts must be totally protected.

Mr King make it clear that introducing 'fire-breaks and fire-walls' to protect customers' core savings would not give the banks a bail-out option, but that 'ring-fencing deposits would make retail banking more credible'. He told the Commission: 'Badly-managed banks should go out of business.' 

Narrow banks

The narrow bank idea would separate deposit, or core banking from necessary banking, including loans and investments. Non-essential banking would not be protected by the fire-walls. A bank that took too much risk on-board and subsequently failed would not receive a government bail-out, funded by the tax-payer, and would be allowed to collapse. 

Mr King said that the timescale for changing the nature of banking would be long-term. In response to a question from Which? chief executive Peter Vicary-Smith, the Bank governor said: 'It will take time before the banking system gets back to the same level of health it enjoyed before the crisis. The big issues can only be solved by long-term reform.' 

Savings protection

Mr King was quizzed on the current level of protection for savings, currently £50,000 per account from each separately-authorised provider. He did not feel that there was any major benefit to increasing the amount that a saver could claim through the Financial Services Compensation Scheme (FSCS), given that the narrow bank concept would automatically protect all cash held in retail deposit accounts, albeit with a lower interest rate to reflect their protected status. 

Mr King also pointed out that raising the limits would probably not help people in certain life stages, such as when they have sold their home or have just inherited a large sum of money, or when their divorce has come through and their account is temporarily boosted. He told the commission: 'In these cases, savings would be guaranteed. There would be no risk. Savings would be completely safe.'


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