It is revealed today in an FOI release that bank regulators have considered imposing fee upon banks for deposit guarantees. From Banking Day:
Regulators canvassed a range of scenarios, with the mooted annual fee ranging from two basis points to 23 basis points of insured deposits…One scenario that recurs in the documents is how to achieve an insurance fund size equal to 0.5 per cent of covered deposits. A fee of 10 basis points would reach the target within six years and a fee of 20 bps would reach the target within three years…A fee of 23 bps would take 10 years to generate a fund equal to two per cent of covered deposits.
Good idea. Though the notes, which are heavily edited, do not indicate that regulators are or have considered the main reason for considering such fees. As we know, the banks enjoy a material two-notch upgrade in their credit-ratings owing to guarantees, which includes the implied guarantee to wholesale borrowing, not just deposits. As such, we are unable to run government deficits to support growth over the cycle if we need to (and we will).
One way of changing this would be an insurance system that broke the linkage between government guarantees and all bank liabilities.
If the framework that regulators are using is simply one in which they’re considering whether its better to charge banks for specific failures before or after a collapse, which appears to be the case, then they’re busy fighting the last war.
