Richard Northedge: Banks win concession on protecting savers' cash

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The Independent Online

Bank depositors will be compensated in full for the first £50,000 of their savings under a new protection scheme, but the banks have won their argument against putting up cash in advance.

The banks had opposed a US-style fund for bailing out customers of failed banks that would have meant allocating billions of pounds against an event that might never happen.

Chancellor Alistair Darling has reluctantly agreed that while other banks will have to provide compensation if one of their number fails, initially at least they won't have to make an upfront contribution. The state will make the payment and recover it from banks later through a levy.

At present, customers are guaranteed ro get only the first £35,000 of their deposits back in the event of a bank collapsing – and until changes made when Northern Rock hit trouble last September, they received only part of that £35,000. The limit was removed entirely for Rock customers in a desperate attempt to stop the run on the bank. Despite the Rock being in state ownership, there is still no cap on compensation and none proposed in the changes.

At £50,000, UK banks would guarantee deposits to roughly the same level as in France, Canada and the US. Only Italy offers significantly better protection.

Darling believes any payout after a collapse must be made quickly to maintain confidence in the banking system. But some bankers claim that speedy payments would be impossible because of the potential incompatibility between the systems used by the failed institution and those of any bank that tried to mount a rescue.

The Chancellor has set a target of just one week for money to be returned following a failure, compared with the month typically taken by the Financial Services Compensation Scheme. If the failed bank's systems prevented such fast-track compensation, he would still want the scheme to make an interim payment within seven days.