Britain's deposit protection scheme currently holds funds of just £4.4m, it emerged yesterday as banks warned that consumers face sharp price rises to pay for the Chancellor's plans to offer a £100,000 guarantee.
The Financial Services Compensation Scheme took control of a £9m fund from its predecessor scheme but that has been gradually whittled down through payouts to depositers with collapsed credit unions.
The scheme's meagre resources are in stark contrast to America's Federal Deposit Insurance Corporation which has a $49bn (£24bn) fund and the power to take control of the deposits of failing banks.
A spokesman for the FSCS said the scheme could call on up to £139m – chiefly by plundering funds set aside to cover compensation claims from other parts of the financial services industry.
However, in the event of a major failure it would have no choice but to impose a huge levy on the rest of the industry, which some observers warn could severely dent its profits.
Northern Rock, for example, held deposits of £22bn before plunging into crisis caused by its announcement that the Bank of England had agreed to provide an emergency financing facility.
The scheme currently covers a person's first £2,000 on deposit and 90 per cent of the next £35,000. Senior bankers say plans announced by the Chancellor, Alistair Darling, that would improve the payout to provide consumers full protection on deposits up to £100,000 will impose a huge funding cost to the industry.
They have warned that consumers would inevitably face sharp price rises through higher mortgage rates and lower deposit rates if they are put into operation without being properly thought through.
A senior industry source said yesterday: "We accept that reform of the existing scheme is inevitable but there are questions to answer about how it will be funded. The £100,000 figure seems very high and really ought to be accompanied by some reform of the insolvency law if it is to work like the US system."
Angela Knight, the chief executive of the British Bankers Association, said: "I think there is always nervousness when announcements are made in a very high-level manner and we certainly want to have an input into the work that is being done before reforms are made. Changes made during wartime are often not right for the peace.
"We entirely accept the need to give confidence to consumers but whatever is done in this area will have an impact on consumers."
The source also warned that reform was likely to take many months to put into effect. "We don't believe there will be anything in the Queen's speech and then you have to wonder whether there will be the political will to do anything down the line."
The American and Canadian schemes, widely seen as the best in the world, currently cover the first $100,000 or C$100,000 – around £50,000 at current exchange rates.
The US scheme's $49bn fund was built up from charging banks insurance premiums on the deposits they hold. It also gives the FDIC the right to take control of a bank's deposits and transfer them to third parties if the bank becomes insolvent because depositers are given a privileged position in US bankruptcy law.
That is not the case in the UK where depositers must wait in the queue with other creditors for money, above the limits set under the FSCS. The FSCS can also take six months or more to pay out, whereas the US and Canadian systems promise consumers that they will be able to access their money instantly.Reuse content