Guernsey Mulls Introduction Of Deposit Protection Scheme

by Phillip Morton, Investors Offshore.com

02 October 2008

Guernsey's Commerce and Employment Department announced on Thursday that it is currently in discussions with the Guernsey Financial Services Commission and the banking industry on the possibility of introducing some form of deposit protection scheme in Guernsey.

The move is being made to ensure that the people of Guernsey continue to have confidence in the banking sector.

Whether Guernsey introduces a deposit protection scheme is ultimately a matter for the States.

The Commerce and Employment Department will ensure that the views of all interested parties are properly considered so that the States are aware of all the issues before the final decision is taken. The Department will give this matter priority and ensure that it progresses as swiftly as possible once the recommendations of the Guernsey Financial Services Commission are finalised.

Rushing to introduce a deposit protection scheme, or merely replicating a scheme from another jurisdiction, may result in a scheme that is at best inappropriate to Guernsey’s banking sector and at worst, may result in serious long term consequences for the banking sector in Guernsey.

The department has been keen to point out that a poorly designed system of deposit protection put together in haste may:

  • encourage excessive risk taking by the banking industry in the knowledge that the deposit protection scheme will be around to compensate depositors in the event the bank fails;
  • increase instability in the banking industry, and;
  • impose a potential cost to the taxpayers of Guernsey either because bank profits may be reduced in the medium term so lessening tax revenues or in the longer term by creating an expectation that the States will underwrite banks’ liabilities to customers.

The Commerce and Employment Department and the Guernsey Financial Services Commission recognise that in the event the States decide to introduce such a scheme it must be carefully constructed to avoid these pitfalls.

The reality is that the development of a deposit protection scheme must address a range of complex technical issues.

These include: the compensation level; which depositors will receive compensation; how the compensation will be funded and paid in the light of the types of banks in Guernsey and their deposit base; and how the cost burden will be shared by the population of banks in Guernsey.

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