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Last Updated: Friday, 4 January 2008, 10:40 GMT
Bank watchdog 'to get more power'
Alistair Darling
Mr Darling is planning new legislation in May
The chancellor is planning to give the Financial Services Authority more power to deal with failing banks to avoid another Northern Rock-style crisis.

Alistair Darling has proposed giving the FSA the power to seize and protect customers' cash if their bank was to get into difficulties.

He would also give the regulator power to make sure that banks in trouble have enough day-to-day cash to keep going.

Mr Darling plans legislation in May after a three-month consultation.

Savers queued to withdraw their money from Northern Rock in September after it emerged that the bank had been forced to approach the Bank of England for emergency funding.

It was the first run on a UK bank in more than a century.

Response unit

Mr Darling has ruled out having a special institution designed to take over banks that get into trouble, as happens in the US.

The FT's seasonal interview with the chancellor is perhaps more interesting for what he doesn't spell out, rather than what he makes explicit
Robert Peston, BBC business editor

But he wants to introduce a new Cobra-style response unit - based on the civil contingencies committee - to deal with any future financial crises.

In an interview with the Financial Times, Mr Darling said that he planned to "give the FSA the powers that it needs".

Among the powers he might give the FSA is the ability to separate failing parts of a business from the healthy parts and possibly move all deposits to another bank that is not in trouble.

Asked about how he planned to change the protection that savers received, he said he wanted, "to make sure there is no doubt how much money is guaranteed... and also to make sure people can get out their money fairly quickly".

He is set to outline a more generous deposit guarantee scheme. At present, 35,000 is guaranteed by the Treasury.

Mr Darling said that he was also planning to make some changes to the current tripartite arrangement, under which crises are dealt with by the FSA, the Bank of England and the chancellor, but added there was "nothing fundamentally wrong" with the system.

The governor of the Bank of England, Mervyn King, has complained that the existing system did not give any of the three institutions the powers they needed to prevent the run on Northern Rock.

Warning to banks

Angela Knight from the British Bankers' Association broadly welcomed the proposed measures but called for closer consultation with the banking industry.

"Early intervention has to be right when a financial institution gets into difficulty," she told the BBC.

"These are technical areas and we have to get them right."

BBC business editor Robert Peston said there was quite a threatening tone by the chancellor towards banks who might in the future follow the example of Northern Rock and request emergency funding.

"He's very unhappy with the fallout from the request for emergency funds in the sense that the board of Northern Rock and its shareholders have retained considerable power to influence their own destiny even though the government lent this institution 57bn.

"What he's saying is if a bank requested emergency funds in that way, broadly speaking the power of the board and its shareholders would, at a stroke, go, and the chancellor and the FSA and Bank of England would at that point be in charge and would have much greater power to control the destiny of the bank.

"We wouldn't be in the kind of mess we are at the moment where the taxpayer has extended all this money but shareholders can, in some people's view, still hold the government to ransom."

A banking expert on the impact of Darling's decision

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