Strategic Reserve Fund: use for Bank Depositors’ Compensation Scheme.

STATES OF JERSEY

STRATEGIC RESERVE FUND: USE FOR BANK DEPOSITORS' COMPENSATION SCHEME

Lodged au Greffe on 2nd June 2009

by the Minister for Treasury and Resources

STATES GREFFE

2009   Price code: B  P.84

PROPOSITION

THE STATES are asked to decide whether they are of opinion

to refer to their Act dated 5th December 2006 in which they approved a revised policy for the use of the Strategic Reserve Fund established under Article 4 of the Public Finances (Jersey) Law 2005 and agreed that the Fund should be a permanent reserve, where the capital value was only to be used in exceptional  circumstances  to  insulate  the  Island's  economy  from  severe structural decline such as the sudden collapse of a major Island industry or from major natural disaster, and –

1. to agree to vary that policy to enable the Strategic Reserve Fund to also be used, if necessary, for the purposes of providing funding for the Bank Depositors Compensation Scheme to be established under the  Banking  Business  (Depositors  Compensation)  (Jersey) Regulations 200-; and
2. to  agree  that  monies  from  the  Strategic  Reserve  Fund,  up  to  a maximum  combined  total  not  exceeding  £100 million,  should  be made available if required to meet the States contribution to the Bank Depositors Compensation Scheme and/or to meet any temporary cash flow funding requirements of the Scheme.

MINISTER FOR TREASURY AND RESOURCES

REPORT

1. Background

1. The Minister for Economic Development is lodging the Banking Business (Depositors Compensation) (Jersey) Regulations 200- seeking States approval to a Bank Depositors Compensation  Scheme to ensure that compensation would be payable (up to a maximum £50,000) if a Jersey registered bank is declared bankrupt.
2. The case for a Bank Depositors Compensation Scheme in Jersey has been made by the Minister for Economic Development in the report covering the Banking  Business  (Depositors  Compensation)  (Jersey)  Regulations  200-. Political assurances have already been given that the States would provide financial assistance and support to depositors should a bank default in the Island in advance of a Compensation Scheme being formally approved.
3. The total cost of the proposed scheme is capped at £100 million.
4. The Scheme is funded by imposing a levy on banks operating in the Island; these levies may be spread over up to 5 years. Where the total bank levy is insufficient to meet the full cost of the Scheme, the States will be required to make a contribution to the Scheme.
5. The structure of the Scheme is such that income due from bank levies may not be  received  until  after  compensation  payments  fall  due  and  the  Board administering the Scheme may need to borrow funds to meet any short-term cash flow requirements.
6. The purpose of this report and proposition is to gain States approval to change the  policy  for  the  use  of  the  Strategic  Reserve  fund  so  that  it  could,  if necessary,  be  used  to  provide  financial  support  to  the  Depositors Compensation Scheme.

2. Strategic Reserve – current policy

1. The current States policy for the use of the Strategic Reserve was approved by the States on 5th December 2006 as –

"The Strategic Reserve should be a permanent reserve, where the capital  value  is  only  to  be  used  in  exceptional  circumstances  to insulate the Island's economy from severe structural decline such as the sudden collapse of a major Island industry or from major natural disaster."

2. The supporting report to this decision can be found in P.133/2006.
3. At the time that this policy was approved, the current financial situation was not  evident  and  there  was  no  call  for  a  Bank  Depositors  Compensation Scheme.

4. The Public Finances (Jersey) Law 2005 requires that any decision on the use of the Strategic Reserve Fund is made by the States on a proposition brought forward by the Minister for Treasury and Resources.

3. Why fund the Depositors Guarantee Scheme from the Strategic Reserve?

1. There is no indication that a Jersey Bank will fail – the Jersey banking sector is characterised by a strict licensing regime (the Top 500 rule) and is generally considered  to  be  well  controlled  compared  with  average  international requirements. Many of the banks operating in the Island are part of larger banking groups which, recent events have shown, are seen as too large to fail by the U.K. Government.
2. Forecasts suggest that the level of  income to the Consolidated Fund will reduce over the coming years and the Stabilisation Fund is to be used to deal with the impact of the current economic downturn.
3. This then leaves the States' longer term Strategic Reserve Fund. Although the failure of one Jersey registered bank may not be seen as the same as the collapse of a major Island industry, as defined in the current policy, it is an issue which could result in a significant impact on the Island's major industry. The failure to have a credible compensation scheme in place could lead to a loss of confidence by investors and to the movement of cash deposits out of the Island. The States must therefore have a reasoned plan of action available to prevent this situation occurring.
4. In bringing this report and proposition forward it is the intent of the Minister for Treasury and Resources to gain the support of the States Assembly to use the  Strategic  Reserve,  if  necessary,  to  provide  the  appropriate  financial assistance and support up to a maximum £100 million to the Bank Depositors Compensation Scheme Board.
5. The Bank Depositors Compensation Scheme Board may need to borrow funds to  meet  any  short-term  cash  flow  requirements,  i.e.  to  pay  compensation before receiving bank levy income. This proposition would include provision of this short-term loan funding within the purpose of the Strategic Reserve.
6. If  the  levies  imposed  on  the  bank  are  insufficient  to  meet  the  Scheme's obligations, the States will be required to contribute to the cost of the scheme. This proposition would include provision of this States contribution toward the cost of the Scheme within the purpose of the Strategic Reserve.
7. The total cost of the Scheme is capped at £100 million. Therefore, the total combined  financial  support  provided  to  the  Scheme  by  way  of  loan  and contribution is also limited to £100 million.
8. The amendment to the existing Strategic Reserve policy to enable it to be used to meet the costs, up to £100 million, of the Bank Depositors Compensation Scheme, should provide the relevant commitment to the Scheme to enhance depositor protection and market confidence as well as maintain the Island's standing from an international competitive basis.

9. The Minister for Treasury and Resources will consider the most appropriate method of funding a Bank Depositors Compensation Scheme if such a need arose.  The  agreement  of  this  proposal  will  enable  the  Minister  to  make reasoned decisions and to propose the use of the Strategic Reserve up to £100 million should it be the most appropriate approach at the time.

4. Financial and manpower implications

1. There are no additional manpower implications arising from this proposal.
2. There will be financial consequences to the Strategic Reserve Fund if a Jersey registered bank is declared bankrupt under the terms of the Banking Business (Depositors Compensation) (Jersey) Regulations 200- and there is a need to meet the States contribution to the Scheme from the Strategic Reserve fund.
3. If the Strategic Reserve is to provide a source of funding to support the Banking Business (Depositors Compensation) (Jersey) Regulations 200-, it will need to hold £100 million in readily marketable assets. This is within the scope of the current investment strategy and will have minimal, if any, impact on the financial return expected from the reserve.
4. If it is necessary to make a loan to the Depositors Compensation Scheme it is envisaged that the loan will be repaid with interest and terms and conditions agreed by the Minister for Treasury and Resources.