Specialist financial services group London Scottish Bank said today that it had gone into administration.
The Treasury confirmed that it would protect all retail deposit savings with the bank - including those with deposits above the £50,000 maximum limit.
The Manchester-based bank said it was forced to call in administrators after suffering a shortfall in regulatory capital and was unable to find a firm buyer for the business in time.
The bank has around 10,000 savers with some £250m in deposits.
There are also more than 700 staff at the bank, which offers fixed-rate savings accounts and lends money to people with poor credit histories.
The Chancellor confirmed all eligible depositors under the Financial Services Compensation Scheme (FSCS) would be not lose their savings.
Administrators said all 10,000 depositors are eligible under the scheme.
The Treasury said it had "taken decisive action to protect the interests of retail depositors and wider financial stability".
Administrator Ernst & Young will be in contact with individual savers "shortly", it added.
London Scottish had been hoping to secure a sale after it struggled with a multimillion-pound hole in the amount of capital it is required to hold by regulators.
The bank said today that a number of potential suitors remained interested, but added that it was forced to go into administration with "no certainty" of any offer or that the capital shortfall would be met.
The Financial Services Authority yesterday ruled that it could no longer take deposits in light of the failure to secure its future, leading to an administration order being made just before midnight.
Shares in the group were suspended today at 2.62p having lost almost all of their value amid its financial problems over the past year.
The group offers unsecured loans from £100 to £1,000, which it collects direct from people's homes.
It also has mortgage business, including "right-to-buy" under local authority housing sales.
As at the end of April, it had £274m in customer loan accounts.
However, the bulk of its business is run through its debt collection arm, Robinson Way, which collects consumer debts for blue-chip companies and public sector bodies, including local authorities and utility firms.
The group has built up its retail deposit base through offering a high- interest bond guaranteeing fixed interest payments on lump sums between £2,000 and £250,000 which are invested over periods from one year to five years.
London Scottish had begun moving away from door-to-door collection in recent years to more branch-based business, but its financial troubles saw it start to exit consumer finance.
Earlier this year it employed more than 2,000 people at 52 branches across the UK, but has closed 48 of those branches and made around 330 staff redundant since January.
The firm reported widening losses from its consumer credit business and bad debts in the division left it nursing a regulatory shortfall, which was first revealed last New Year's Eve.
Its underlying pre-tax loss in the six months to 30 April stood at £7.4m.
The group has been in close contact with the FSA since the shortfall was uncovered.
The FSA said today: "As a result of the bank's administration, the Financial Services Compensation Scheme (FSCS) has been triggered to safeguard retail deposits.
"The FSCS is now putting arrangements in place to pay back customers and will provide further information for customers shortly. The Chancellor has taken action to protect FSCS-eligible retail depositors above the FSCS limits."
London Scottish customers can contact the FSCS through its website at www.fscs.org.uk/consumer or by phoning 020 7892 7300.