Government acts to prevent repeat of Northern Rock crisis

New regulations to ensure that banks have enough cash to pay out to their customers are to be introduced by the Government to make sure there is no repeat of the Northern Rock crisis.

The Chancellor, Alistair Darling, is preparing to bring in more protection for customers, under which banks will have to demonstrate that they are not over-reliant on one source to fund operations.

"Northern Rock got into trouble because its main source of income dried up," said a Treasury source.

The Bank of England was forced to give emergency financial support to Northern Rock, Britain's fifth biggest mortgage lender, after it became the highest-profile UK victim of the global credit crunch.

The Governor of the bank, Mervyn King, later did a U-turn by releasing £10bn into the markets to ease the crisis. The move sparked speculation that he was put under political pressure to act by the Treasury.

In his keynote speech to the Labour Party conference today, Mr Darling will warn that because of globalisation "an event in one part of the world can affect us all within just a few weeks".

The Chancellor yesterday signalled that the Government was planning to plug the gaps in the system exposed by the Northern Rock crisis, by raising the limit on the amount of savers' money protected by law. "This is a bullet that needs to be bitten," he said, suggesting that the maximum sum protected could be more than trebled, from £31,700 to £100,000.