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The Bank of England has introduced a new rule to clamp down on foreign lenders with large amounts of high-value deposits to close “a gap” identified after the collapse of Silicon Valley Bank’s UK arm.
The BoE said on Tuesday it would require international banks with more than £300mn of instant-access deposits from retail customers and small businesses to set up a UK subsidiary with its own capital and tighter supervision requirements.
The new rule was challenged by two of the four banking lobby groups that responded to the BoE’s consultation on the new rule, the BoE said, adding that they had argued the £300mn threshold should have been higher.
Bank lobbyists also pushed for the BoE to exclude deposits from charities, charitable trusts, schools and colleges, or religious establishments from the calculation of the new £300mn deposit threshold. But both suggestions were rejected by the regulator.
The BoE said it had noted that the UK’s openness to foreign banks “may increase the risk of contagion”, and its decision was “in part a response to lessons learned from the failure of Silicon Valley Bank”.
SVB collapsed in 2023 as part of turmoil in the US banking sector caused by rising interest rates, causing the failure of its UK operation, which had to be rescued by arranging its sale for £1 to HSBC.
The BoE said the failure of SVB “demonstrated a key benefit of subsidiarisation in that it offers the UK financial authorities greater information and tools to ensure a smooth resolution. However, it also highlighted a potential gap in the framework.”
Most of SVB’s UK £6.7bn in deposits were large amounts from wealthy individuals or small businesses that exceeded the limit for insurance under the country’s Financial Services Compensation Scheme, which was set at £85,000 and is being increased to £110,000.
Regulators view large deposits which are not covered by guarantee schemes as more risky sources of funding for banks as they are more likely to be withdrawn at the first sign of a crisis. The BoE added that less than £100mn of SVB’s UK deposits had been covered by the FSCS guarantee schemes.
The BoE’s new rule was set “in expectation that it would not materially impact the existing population of branches,” the regulator said.
The BoE also said it was raising its existing thresholds for when foreign banks have to set up a UK subsidiary to adjust for inflation.
These require foreign banks to set up a UK subsidiary if they have more than £100mn in deposits from retail customers or small businesses that are covered by the FSCS, or if they have over £500mn in total deposits covered by the FSCS. These are being raised to £130mn and £650mn respectively.
“These changes will maintain the UK’s very open approach to international banking, while filling a gap we identified in our regime and increasing some thresholds to support competitiveness and growth,” it said.
