UK banks could be tapped for billions

UK banks could be tapped for billions

By George Parker, Peter Thal Larsen and Jean Eaglesham

Published: January 29 2008 21:45 | Last updated: January 29 2008 21:45

UK banks face having to put billions of pounds into a revamped scheme to compensate savers in a banking collapse, as part of a wide shake-up of the sector after the Northern Rock debacle.

Alistair Darling, chancellor, will on Tuesday launch a three-month consultation on legislation to control the damage of a future banking crisis, including an idea that banks fund upfront the depositor compensation scheme.

The idea is unpopular with banks and Mr Darling will admit there are “significant disadvantages” in forcing them to pay into a compensation pot when capital is tight. “This is a very significant IOU the government is handing to the banking sector,” one banking executive said.

MPs on the Treasury select committee insist banks should pre-fund the scheme, preferably in economic good times, to reassure savers and provide instant money if a bank goes under.

One alternative would be to retain the “pay as you go” approach, where the scheme is funded by loans in the event of a crisis and later repaid by banks . Another would be to make banks partially pre-fund the scheme.

Mr Darling’s paper launches a consultation on whether the current level of saver compensation -- 100 per cent of the first ￡35,000 -- should be extended to ￡50,000 or even ￡100,000.

The banks want to keep the figure at ￡35,000, covering an estimated 97 per cent of savers. But the chancellor has an open mind, arguing that the 3 per cent of remaining savers hold roughly 50 per cent of all bank deposits.

The consultation includes requiring banks to have systems to inform the Financial Services Authority at “short notice” their liquidity situation. There will be proposals for a banking insolvency regime, allowing authorities to take a failing bank out of the market, protecting savers’ deposits and parcelling out parts of the business to another bank.