Bermuda's top financial regulator Matthew Elderfield yesterday said he did not believe deposit insurance was necessary in Bermuda at this time — but he has been involved in talks with Government to discuss it.

The Bermuda Monetary Authority chief executive officer said ensuring banks had sufficient capital to withstand a drastic deterioration in economic conditions was an effective way of protecting customers.

Mr. Elderfield said the regulator had asked all Bermuda's banks to carry out their own "stress tests", simulating the impact of a severe economic downturn on their investment portfolios and lending activities. The BMA also conducted its own stress tests.

And following yesterday's announcements of a $200 million capital raise by Butterfield Bank and a $20 million capital injection for Capital G Bank, Mr. Elderfield said that all the Island's banks now had a sufficient "capital buffer" to withstand a substantial worsening of the economy.

"The BMA believes capital is the best tool we can use in this situation," Mr. Elderfield said yesterday. "Capital is a buffer to protect consumers. It's like a firebreak between the consumer and the financial crisis. What we have done is to widen that firebreak to protect those consumers."

In the US, the banking industry-funded Federal Deposit Insurance Company provides insurance for customers' deposits of up to $250,000.

In Bermuda no such scheme exists. Mr. Elderfield said the Authority had worked with Government to draw up proposals for how it could work on the Island, to create another potential "tool" for the protection of consumers.

"At this point, we don't think deposit insurance is necessary, because we have a very conservative capital regime," Mr. Elderfield said.

He likened the stress testing and the subsequent boosting of capital buffers, to preparing for a hurricane. "We've been tracking a huge financial storm and we know it's going to brush past us but we don't know how close it's going to get," Mr. Elderfield said. "So we have to be fully prepared."

The regulator has intensified its supervision of the banking sector over the past 18 months and has found that Bermuda's banks are exceeding the BMA's current capital requirements. The BMA's decision to require an additional capital buffer was made in agreement with the banks.

It seeks to ensure that banks could absorb losses from a severe downturn and still maintain a Tier 1 capital ratio of six percent — a higher standard than stress tests in the UK which require a four percent ratio. The actions come as the BMA adopts the Basel 2 capital rules, an internationally adopted standard of bank capital regulation which was implemented in Bermuda from the start of this year.