Leading article: The crisis seems over, the cracks remain

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The Independent Online

In the end, Chancellor Alistair Darling had little choice. All attempts to reassure the worried savers queuing outside branches of Northern Rock had failed. There was nothing left but to announce that all deposits in the building society would be guaranteed by the Government – "guaranteed safe and secure", as the statement put it for extra emphasis. That it had to resort to such a measure, however, is an indictment of the Government's handling of the crisis – and sad testimony to the continuing climate of mistrust. The more reassurances the Chancellor offered, the more worried Northern Rock's customers became. The risk that the crisis would spread was something the Government, rightly, could not countenance.

So it is now the taxpayer who will pick up the tab for the high-risk business practices of Northern Rock. But it will also be impossible for the Government to deny equivalent support to any other banks that might find themselves in similar straits. Public confidence in the banking system has been bought at a price that could prove very high – and not only in financial terms.

It will not escape attention that in the international fallout from the US sub-prime mortgage crisis, only Britain has suffered a run on a bank. While other central banks quietly underwrote faltering institutions, the Bank of England declined to do so. Its motives – that high-risk businesses had to reap what they had sown and that bail-outs could encourage irresponsible lending – were commendable in principle; in practice, they proved untenable.

In making the Bank of England independent, with the Financial Services Authority as regulator, the Government had wanted to demonstrate its credentials for sound economic management and set a distance between politics and finance. When the crunch comes, it is now clear, this distance shrinks by the hour. No government of a developed country in the modern age can afford to stand aside and watch a run on the banks. A government which vaunts its economic competence and claims credit for the City of London's rise to global financial leadership can afford it least of all.

The Chancellor's guarantee may bring the immediate crisis to an end. But it has exposed worrying weaknesses in a banking system that we had, perhaps complacently, believed among the most solid in the world.

Few savers, for instance, will have been consoled to learn that, before yesterday, bank deposits of more than £2,000 were guaranteed at only 90 per cent, and not at all if they exceeded £35,000. A more generous system, closer to that of the United States, which also places depositors at the head of any queue of creditors, should be considered. Savers cannot be expected to study business models and balance-sheets before depositing their money. The viability of the bank is a matter for the share-holders and directors – and, of course, the regulators.

Which is why one of the first things the Government needs to do is to scrutinise the responsibilities and functioning of the FSA. The Chancellor and the Bank of England can both be faulted for not anticipating how normal human beings would react if their savings seemed endangered. Some blame – how much, we shall see – surely attaches also to the Prime Minister (and former Chancellor), whose silence so far has been deafening.

It is hard to believe that the FSA should not have taken a greater interest in the lending practices at Britain's more adventurous banks and the likely knock-on effects of the US mortgage crisis. As regulator, it has a duty to consider many interests: those of the business, the borrowers, the depositors and, of course, the economy as a whole. Nothing about this crisis has countered the perception that, when these interests conflict, those of the ordinary consumer come last.