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Last Updated: Saturday, 22 September 2007, 13:22 GMT 14:22 UK
Savings guarantee plan considered
Alistair Darling
Mr Darling says he is looking at a wide package of financial reforms
Chancellor Alistair Darling says he is looking at ways of guaranteeing people's savings held by a bank or building society up to 100,000.

He told the Times newspaper it was a "bullet that needs to be bitten" and would be paid for by a levy on banks.

Mr Darling said he was considering a wide package of financial reforms - but that these were still in the early stages of development.

The Bank of England has called for more protection for customers' savings.

'American-style system'

The current system, guaranteeing 100% of the first 2,000 and 90% of the next 33,000, contributed to this month's run on Northern Rock, says the Bank.

It was "logical" for savers with more than this amount of savings to rush to take it out, Bank governor Mervyn King told MPs this week.

Some of the planned changes to banking rules were already in the pipeline before the run on Northern Rock and would be announced when the House of Commons returns next month, Mr Darling said.

If you give a bank your savings to look after and invest, they should promise to look after them
Fran Banks, Essex

According to the Times, he is looking at an American-style system, where savers' money is guaranteed and paid out days after a bank collapses, funded by a levy on banks and other financial institutions.

The chancellor will himself be called before the treasury select committee to explain why the Bank of England and financial authorities failed to foresee the recent crisis.

John McFall, chairman of the committee, told BBC News 24 the current compensation scheme was "inadequate," and that the chancellor's proposals were a step in the right direction.

'Underlying problems'

Mr McFall said: "The hundred thousand pounds is a good figure, perhaps it could be more at the end of the day, we don't know, but it's up for discussion.

"We need people to feel reassured that if anything happens that they get their money almost instantly."

Shadow chancellor George Osborne promised the Conservatives would help the government to push through any changes that were needed.

He told BBC News: "We are happy to work with the government to put in place new financial compensation arrangements and speed their passage through Parliament."

There are much deeper wounds that need properly addressing as soon as possible
Vince Cable, Liberal Democrat treasury spokesman

However, Liberal Democrat treasury spokesman Vince Cable said the proposals did not go far enough.

He said: "The chancellor's plans to guarantee bank deposits up to 100,000 is a necessary sticking plaster to stop bleeding from the banking system.

"But there are much deeper wounds that need properly addressing as soon as possible."

Mr Cable agreed that the money should come from the banks rather than taxpayers.

The whole lending system needed to be looked into, he said, blaming the government for showing a "complete neglect" of household debt problems.

Far East

Mr Darling described the international credit crunch caused by the collapse of the US sub-prime mortgage lending market and the resulting problems at Northern Rock as a "major upset".

"What's happened in America, and what's now affecting countries all over the world is a major shock to the system.

"Its effects have been felt here, in the Far East, and we have to deal with it," he told the Times.

But he was optimistic about the future of the UK housing market.

Customers queue to enter a Northern Rock branch in Chelmsford in Essex
Queues were seen at Northern Rock branches across the country

"I take the view that the slowing of house prices and ensuring that they are based on reality is not a bad thing," he told the newspaper.

"It is in no one's interest for house prices to go on rising year after year when that is not justified."

Last week the Bank of England was forced to give emergency financial support to the Northern Rock.

The Newcastle-based firm was the highest-profile UK victim of the global credit crunch, triggered by the sub-prime mortgage crisis in the US.

The crisis resulted in a rush of customers at Northern Rock branches across the country queuing to withdraw savings, fearful that the business could collapse.

The bank has refused to comment on claims in the Financial Times that it has borrowed 3bn from the Bank of England in the past week.

Background to recent banking problems

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