Emergency lifeline for collapsed banks doubled to £3bn
The emergency credit fund that serves as a lifeline for collapsed lenders has been doubled as a result of “recent regulatory and operational developments”.
The Financial Services Compensation Scheme (FSCS) – working in tandem with the Treasury and Bank of England – has hiked its revolving credit facility capacity to £3bn from £1.45bn previously.
The FSCS is funded by an annual levy on authorised financial services, which then goes towards compensation payouts to consumers when a deposit-taking firm goes bust. The levy is set to be reduced to £22m, down from previous estimates of £27.3m in November 2025.
The body cited a “higher opening balance” for this, which came after “lower-than expected compensation paid in the previous financial year”.
But it warned the reduction was “partially offset” by an increase in management expenses, which jumped £11.5m to £25.9m since November.
This reflected a “range of recent regulatory and operational developments that have required the FSCS to strengthen its preparedness of larger and faster payouts,” namely the expansion of its credit facility to “ensure it is prepared should higher future funding demands arise”.
The revolving credit facility acts as a standby emergency line funded by the financial industry and backed by the Treasury and the Bank of England. It supports powers under the Bank Resolution (Recapitalisation) Act 2025, a piece of legislation designed to ensure the immediate financial muscle is available for larger and faster payouts without disrupting customers.
Financial system faces ‘large, frequent and potentially overlapping shocks’
The defensive manoeuvre comes after London’s blue-chip banks set aside £2.5bn in loan loss provisions in the first-quarter of the financial year.
The FTSE 100’s Big Five – Standard Chartered, HSBC, Natwest, Barclays and Lloyds – collective pre-tax profit hit £15.6bn skimmed past the £15.5bn consensus and 2025’s taking but undershot 2024’s first quarter by a whopping £1bn.
But this was overshadowed by the rising tide of risks in the period.
The collapse of specialist lender MFS served as one major catalyst, leaving Barclays nursing a £228m hit. HSBC reported a $400m hit from a similar fraud-related charge, which reports suggested was MFS.
Between the cohort, around £600m in provisions was attributed to the Iran war.
Earlier this year, the Bank of England’s Financial Policy Committee top officials warned the implications of the conflict were “likely to interact with vulnerabilities” in the UK economy.
The committee listed ongoing risks to the financial system as the “stretched” valuations of artificial intelligence stocks and “risky credit markets, notably in private credit”.
“The global environment more broadly was materially more unpredictable as a result of the conflict, increasing the likelihood of large, frequent and potentially overlapping shocks, and episodes of intense market volatility,” it added.
The FSCS said in its report published on Monday its beefed up credit capacity would give it the “ability to respond to failures of significant size, helping to reduce disruption for customers”.
Last November, the Prudential Regulation Authority (PRA) hiked the limit on how much a customer can be paid if their provider fails to £120,000 from £85,000.