Mervyn King, Governor of the Bank of England, is no doubt right in principle that banks should be forced to pre-fund the planned new deposit insurance scheme. It is in theory obviously better that banks be made to fund before a crisis takes place than afterwards. Given that he is thought politically inept at the Treasury, Mr King has been surprisingly successful at getting his way over reform to banking supervision, yet this is one battle he is unlikely to win.
Few banks are in any position right now to pre-fund the type of scheme foreseen. What's more, for the bigger high-street banks, the risk of default is essentially uninsurable. There is no amount of pre-funding that would be capable of footing the bill if one of the main players went to the wall, or none that wouldn't in itself sink the banking system.
Deposit-taking in Britain is too concentrated into a small number of bigger players to make adequate pre-funding possible. There is obviously going to be a problem if the intention is to make the high- street banks pay for a scheme intended to insure not their own depositors, but those of smaller, and riskier, rivals.Reuse content