Page last updated at 12:49 GMT, Tuesday, 1 July 2008 13:49 UK

Savers' cash safer if banks fail

Alistair Darling
Alistair Darling wants to help protect bank customers

Chancellor Alistair Darling has proposed new measures to protect savers in the event of a bank getting into financial difficulty.

The plans are intended to increase public confidence in the banking system in the wake of the near collapse of Northern Rock in September last year.

As part of the plans, the threshold for guaranteed deposits is expected to rise from 35,000 to 50,000.

Any changes will come into effect in the autumn or early in 2009.

The chancellor has presented his written proposals to the House of Commons, ahead of a consultation period.

The measures are not set to cost banks any cash up-front, they will only be approached if problems occur.

Need for speed

Calls increased for the current deposit protection system to be changed after the problems at Northern Rock led to a run on the lender with customers queuing to withdraw their savings.

At this stage, the consultation paper is expected to propose as the lead option an increase in the compensation limit for protected deposits to 50,000, on a per person per bank basis
Treasury report

Should a bank run into difficulties, the terms of the current scheme mean that it can take weeks or even months before savers get their money back.

Despite saying that banks would not have to put cash immediately into a compensation fund, the Treasury is keeping its options open and it could insist on pre-funding in the future if it was appropriate.

However, the British Bankers Association (BBA) has argued that up-front payments of money into a compensation fund would tie up capital and would be an additional drain on liquidity already stretched by the credit crunch.

"It is important that people can get to their cash quickly," Angela Knight, of the BBA, told the BBC.

Ms Knight said that banks had always, and would continue, to pick up the cost of the scheme.

She added that there was a very strong banking sector in the UK, but that the repayment of deposits should be given priority if a bank went under.

In his proposals, the chancellor said the government was committed to savers getting to at least a "proportion of their funds" within seven days of a bank hitting trouble with the balance paid in the "following few days".

'Vital' situation

During the Northern Rock crisis, many savers questioned whether 35,000 was a sufficient threshold in terms of compensation.


The National Consumer Council (NCC) repeated the concerns as they questioned how the 50,000 figure had been chosen.

Spokeswoman Jill Johnstone said the NCC was worried about people who would still lose out, although the Financial Services Authority (FSA) is to study ways to cover those whose savings are higher than the planned compensation limit.

However. Ms Johnstone welcomed the plan for speedier payment of compensation.

"It is a lot better than the situation currently is," she said. "A bank account is so vital to everything we do in our life."

'No guarantee'

The document only outlines the issues for consultation and so changes could be made in the coming months to the plans.

Northern Rock
The system was changed to ease the Northern Rock crisis

Mr Darling said: "No system of regulation can or should prevent the failure of each and every institution, but we must do everything possible to prevent problems which could pose a wider threat to stability."

A large part of the 167-page report goes into detail about how it is planning to prevent another Northern Rock scenario.

There will be consultation on whether banks that receive a bail-out from the Bank of England would have to declare this immediately.

It also aims to bring building societies into a scheme which allows the authorities to take control of a financial institution if it is judged to be failing and other options are insufficient.

Conservative Treasury spokesman Philip Hammond welcomed the moves, claiming that they copied his party's proposals.

He said that pre-funding the compensation scheme was not an option as it would only worsen the banks' current squeeze on lending.

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