In a speech to the Institute of International Finance in Washington, Andrew Bailey said while larger banks have better loss-absorbing liabilities, their smaller counterparts do not.
“In seeking to solve too big to fail, we have tackled this problem by requesting an additional slice of subordinated liabilities which can explicitly bear losses by being converted into equity in the event of a resolution,” he said.
This is in the form of “eligible liabilities” which banks above a certain size in the UK are required to hold.
Depositors in smaller banks are protected by the Financial Services Compensation Scheme, which guarantees deposits of up to £85,000 for all PRA-regulated entities.
However, Bailey said the central bank needs to revisit the protection of deposits in smaller banks.
“The US authorities have announced a review of their deposit insurance system,” he said.
“In the UK, the Bank is also considering improvements to our approach to depositor pay-outs for smaller banks which do not have eligible liabilities.”
So far, the central bank has focused on the speed of pay-outs, and in his speech Bailey hinted that work might be done to look at the overall limit too.
“Going further and considering increasing deposit protection limits could have cost implications for the banking sector as a whole.
“As with all things relating to bank resolution, there is no free lunch.”
Bailey’s comments come after the banking sector was shaken by the collapse of Silicon Valley Bank, despite the US government guaranteeing all deposits at the bank.
There have been calls for the cap in the US, currently $250,000, to be raised in order to firm up confidence in the financial sector.
Speaking about the recent market turmoil, Bailey was confident in the outlook for the sector.
“I don’t believe we face a systemic banking crisis.”