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Last Updated: Wednesday, 30 January 2008, 07:47 GMT
Secret bank rescues to be allowed
Chancellor Alistair Darling
Mr Darling is launching a 12 week consultation on the proposals
Chancellor Alistair Darling is to give new powers to the Bank of England to mount secret rescue operations for banks requiring emergency funds.

The plan will be unveiled today as part of sweeping regulatory reforms designed to prevent a repeat of the Northern Rock debacle, the BBC has learned.

He will also make the Bank of England's loans to a troubled bank rank first in the queue of creditors.

There will be a 12 week consultation period on the new legislation.

"It's unclear whether the devastating run on the Rock could have been prevented by the kind of clandestine help which the Bank may in future be able to provide," said the BBC's business editor Robert Peston.

BBC business editor Robert Peston
There will be a lot of harrumphing in the board rooms of the big banks this morning
Robert Peston, BBC Business Editor

"Such secrecy would only apply where such emergency lending is temporary and limited in nature.

"So the Treasury believes that the Rock probably needed too much money for too long for the Bank of England to be able to keep the rescue operation out of the public domain."

Tripartite system

The tripartite system under which the FSA, the chancellor and the Bank of England work together to deal with emergencies has been criticised for failing to prevent the first run on a UK bank for more than a century.

But that system is expected to remain in place under the new proposals.

The consultation is also expected to discuss what amount of bank deposits should be protected.

Currently, savers have the first 35,000 in each account guaranteed, but the chancellor is likely to suggest extending that.

He may also propose that the protection scheme for depositors should be funded by the banks up-front.

Opposition proposals

The Conservatives have already put forward their proposals for changes to banking legislation.

They want to give the Bank of England new pre-emptive powers to deal with failing banks.

They are also proposing raising the limit for protected savings from 35,000 to 50,000.

But the Conservative plans do not support the idea of up-front payments from banks to fund the deposit protection scheme.

Instead, the banks would pay for the scheme if a bank collapses.

They have also proposed extending the term of office for the governor of the Bank of England from four years to a non-renewable eight years and urged the government to confirm the re-appointment of the current governor, Mervyn King.

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