Miscellaneous Bank of England Levy Rationale for replacing the CRD scheme
The CRD scheme has resulted in cash ratio deposit sizes significantly higher than originally forecast and a lack of predictability for CRD payers as the required cash ratio deposit sizes change in line with gilt yields, which have been lower than anticipated since the 2018 review. This has resulted in the CRD scheme not being able to generate its target income from the investment of deposits and therefore failing to fully fund the Bank’s policy functions. The shortfall to date has been funded from the Bank’s capital and reserves.
	Since the introduction of the indexation approach, gilt yields have persistently fallen below the Bank’s downside scenario. The CRD scheme in its current form has resulted in significant volatility in cash ratio deposit sizes and a lack of predictability for CRD payers as their required contribution changes in line with gilt yields, which have been lower than anticipated since CRD was last reviewed in 2018.
	Consistent with global trends, the market expects the low returns on UK gilts to persist. If CRD is unchanged and low UK gilt yields were to persist, then the CRD scheme’s income would continue to not meet the costs of the Bank’s policy functions and the Bank would have to continue to fund the income shortfall through its own capital and reserves. This would inhibit the Bank from discharging its functions in pursuit of its statutory objectives in respect of monetary policy and financial stability. For the eligible institutions within the CRD scheme, keeping the CRD scheme in its current form would mean that the CRD balances would remain elevated and volatile, resulting in an ongoing lack of predictability for those institutions. Recalibration of the current CRD scheme would require either leaving the Bank exposed to under-recovery of costs in low yield conditions, or making the CRD scheme more volatile and imposing additional uncertainty and cost on CRD payers.
	In 2021, HM Treasury ran a public consultation on the CRD scheme and proposals for an alternative funding arrangement. This confirmed that stakeholders are overall supportive of the proposal to replace the CRD scheme with a new Bank of England levy.