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Last Updated: Wednesday, 30 January 2008, 11:21 GMT
Secret bank rescues to be allowed
Chancellor Alistair Darling
Mr Darling is launching a 12-week consultation on the proposals
Chancellor Alistair Darling has proposed that failing banks should be able to receive help from the Bank of England in secret.

He also wants banks to contribute to a fund to repay savers if a bank fails, instead of paying after the event.

But he does not propose increasing the amount of protected savings in bank accounts from the current 35,000.

There will be a 12-week consultation period on the proposals to prevent another Northern Rock-style crisis.

'Non-disclosure'

The proposals suggest allowing banks to receive emergency funding without having to announce it.

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

Under the plans, a "period of non-disclosure" would be allowed so that there is not an "immediate adverse impact on consumer confidence".

The government wants to avoid the situation in which the news that Northern Rock had received emergency funding led to a run on the bank as savers queued to withdraw their money.

"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 BBC Business Editor Robert Peston.

"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."

Under the plans, the Bank of England will also no longer have to publish accounts each week setting out how much money it has lent as emergency funding.

Bank of England staff will be immune from prosecution by shareholders who are unhappy about the way it has dealt with a particular bank.

Compensation scheme

The proposals also look at the way that people's savings are protected when a bank fails.

At the moment bank deposits are protected up to a limit of 35,000 per person per bank.

The Treasury proposed keeping the limit at that level but has tried to find ways to speed up the process, such as avoiding the need for victims to make formal claims for compensation.

The Conservative Party has proposed raising the limit to 50,000.

Under the new proposals, the banks that fund the compensation scheme may also have to make pre-payments into it instead of contributing when a bank fails.

However, this could prove problematic for banks given the current financial climate.

"The volatile conditions in financial markets that have created anxiety about the robustness of banks are what make the reform proposal difficult for banks: right now they are chronically strapped for cash," said Mr Peston.

The Conservative's plans do not support the idea of up-front payments from banks.

Tripartite system

The current 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 will remain largely in place under the new proposals, although there will be a few changes, including strengthening the Bank of England's role in maintaining financial stability.

The chancellor also wants to introduce a "special resolution regime" that will provide tools to deal with failing banks.

This will allow the quick transfer of a struggling bank's business to a healthy bank, and the appointment of a restructuring officer to the bank seeking help.

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