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Last Updated: Thursday, 20 September 2007, 14:40 GMT 15:40 UK
King calls for protection reform
Northern Rock branch
Would better compensation have meant shorter queues?
The governor of the Bank of England, Mervyn King, has called for better protection for bank savers.

Testifying before MPs on the Treasury Select Committee, he said they should take speedy action to change the law.

"Our system for dealing with the insolvency of banks and deposit insurance is markedly inferior to other countries," he said.

The governor was explaining his role in the recent attempts to stop the Northern Rock bank going bust.

This saw a run on the bank lasting several days, despite repeated protestations from the government, Bank of England and the Financial Services Authority (FSA) that the Northern Rock was in fact solvent.

Unintended consequences

Talking to the MPs in the immediate aftermath of the past week's run on that bank, Mr King admitted that the UK's system for protecting banks had failed to work properly, partly because it had not been able to keep bank customers reassured.

We will ensure that the legislation is passed as quickly as is reasonably possible through Parliament
Shadow chancellor George Osborne

He said the current legislation, under which the Financial Services Compensation Scheme (FSCS) offers some compensation to savers with up to 35,000 on deposit, had contributed to the "unintended consequences of different pieces of legislation coming together".

He called for "serious reform", including that of the FSCS.

Mr King's views were given swift support by the Conservatives.

The shadow chancellor George Osborne wrote to Chancellor Alistair Darling offering the Conservative's co-operation in introducing as "an urgent priority" the changes Mr King had proposed.

"The Opposition is ready to work closely with the Government to reform the deposit insurance scheme, the bank administration procedures and other regulatory obstacles to financial stability identified by the Governor," said Mr Osborne.

"We will ensure that the legislation is passed as quickly as is reasonably possible through Parliament," he added.

US scheme

These calls suggest a head of steam is building up behind the idea of changing or improving the FSCS.

Earlier this week the chief executive of the FSA, Hector Sants, made a similar call.

Although no details are available of any official thinking, it is widely assumed that the authorities are looking at bringing in a scheme similar to the one that operates in the USA - the Federal Deposit Insurance Corporation.

This offers a much higher level of compensation than the FSCS - up to 50,000 for bank depositors.

Also, it can swing into operation very quickly, with cheques being paid out within days, rather than customers having to wait months for an administrator to wind up a bust bank.

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