BoE Governor calls for savers’ guarantees

The Bank of England’s Governor, Mervyn King, has said today that banks should put billions of pounds into a fund over the next 10 years to compensate customers in the event of another Northern Rock collapse.

Mr King was speaking members of the House of Commons Treasury Select Committee on the issue of banking reform, and said that he believed the Financial Services Compensation Scheme should be at least partly pre-funded, and not rely on banks putting money into a fund after a financial institution runs into trouble.

He added that the lack of a 100% cash guarantee of savers’ money contributed to the run on Northern Rock because customers were afraid they would not get their money back.

Customers of Northern Rock were promised by the Government that they would not lose a penny no matter what the outcome. Northern Rock was eventually nationalised earlier this year.

The Financial Services Compensation Scheme currently guarantees 100% of the first £35,000 of savings each person has. However, King believes this should be increased to £50,000.

Mr King said he doesn’t think it’s a good idea to offer 100% insurance up to £50,000, without any element of a risk-based premium at all, and to do that you need some element of pre-funding.

Mr King would not disclose a figure on pre-funding, but added that it should be a ‘non-negligible‘ sum, running into many billions over 10 years.

King went on to say that should there be another Northern Rock episode, he believed the situation would be managed better, but added that there was no guarantee that mistakes would be avoided.

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