Darling promises further review of banking regulation

The Chancellor yesterday defended Britain's arrangements for banking regulation but admitted improvements were needed for them to operate properly in future.

There has been fierce criticism of the apparent confusion between the Bank of England, the Financial Services Authority and the Treasury that surrounded the near-collapse of Northern Rock. Some have called for a redrawing of responsibilities in the three-way arrangement introduced by Gordon Brown when he was Chancellor in 1997, but Alistair Darling rejected the idea.

"This is a model others around the world are now following. But we do need to review how the framework has operated and put in place whatever practical improvements are needed," Mr Darling told the House of Commons. "We need to make more reforms to prevent problems happening internationally and in Britain."

The Chancellor published a consultation paper on revamping the scheme for compensating depositors, in which he seemed to bow to industry pressure by leaving open the question of the maximum sum for compensation.

Shortly after he was forced to guarantee Northern Rock's deposits to stop a run on the bank, Mr Darling had suggested £100,000 as a maximum figure but yesterday's consultation paper said the current £35,000 covered most deposits and compared well with other countries. The paper asked if coverage should be increased and did not suggest a higher figure.

Big banks have opposed a big increase because they would be the main funders of the scheme but would be the least likely to use it.

But Mr Darling is said to be under pressure from his own backbenchers, who are pressing for him to increase the limit to £100,000 because it will soothe constituents' concerns. The Northern Rock crisis has become a hot political issue and its aftermath coincides with the revival of the Conservative opposition, which wants to pin the blame on the Government.

George Osborne, the shadow Chancellor, attacked the authorities' handling of the crisis, saying: "When the crunch came, no one knew who was in charge."

The Treasury also sought views on ensuring essential banking services are maintained if a bank is in crisis and for changes to insolvency arrangements for banks to protect depositors and maintain confidence in the financial system.

The Chancellor said he would press G7 finance ministers to speed up work on agreements about solvency and liquidity and ask for better information on credit ratings and action to clarify the workings of off-balance sheet investment vehicles. He added that he would propose stronger surveillance of the financial system by the International Monetary Fund and the Financial Stability Forum.

Mr Darling said he would seek legal certainty in Europe about what can be done in confidence to aid a bank in crisis and would consider changing rules to make swift bank takeover possible. The Governor of the Bank of England has said he was hampered by these obstacles when dealing with the Northern Rock crisis.

The British Bankers' Association said it welcomed Mr Darling's moves to restore confidence after the "confusion" over the Northern Rock affair but warned against "hasty political decisions".

Northern Rock's borrowing from the Bank of England is now thought to be £13bn after the central bank's "other assets" increased by £2.3bn this week. The balance-sheet item had been stable before the Bank provided emergency funding to the mortgage lender but has shot up each week since.

The Bank of England has agreed to take a wider range of assets as collateral for its loans to Northern Rock. The mortgage lender hopes that will free higher quality assets so that it can secure commercial funding for its business, reducing its dependence on the Bank.