Banking: New powers for watchdog

The fallout from the Northern Rock crisis continues. It has been reported that Chancellor Alistair Darling is looking to boost the powers of the City regulator, the Financial Services Authority (FSA), so it is in a better position to prevent a repeat of September's bank run.

Legislation is expected later this year to allow the FSA to seize and ring-fence customers' cash if a bank or other financial institution gets into difficulty. The idea is that the FSA would ensure customer deposits were safe and could be returned intact if necessary.

The British Bankers' Association welcomed the development but called for consultation before any legislation was laid before Parliament.

This would be the latest measure designed to boost confidence in the UK banking sector following the Northern Rock crisis, the first run on a British bank in nearly 150 years. Already the Government has announced an overhaul of the Financial Services Compensation Scheme, under which depositors will receive a lot more money should their bank or building society go to the wall.

However, any move to increase the powers of the FSA will be seen in some circles as a tacit acceptance that the current system of regulation isn't up to the job. At present, the Bank of England, Treasury and FSA oversee the banking sector in what has been dubbed a tripartite arrangement. Last autumn, critics suggested that this arrangement meant no single institution had the power to halt a bank from sliding into difficulty.