Alistair Darling has already raised the compensation level once

The government announced a review of the present compensation arrangements after the run on Northern Rock.

The British Bankers' Association (BBA) said the present �35,000 limit covered 96% of money in savings accounts.

It argued raising the limit would have "substantial" cost implications for banks, but benefit very few customers.

Cost consideration

Chancellor Alistair Darling indicated he would consider a scheme to guarantee as much as �100,000.

As an interim measure he has already increased the amount protected to 100% of the first �35,000 of savers' money.

There isn't a money tree where you pick your �20 notes Angela Knight, BBA

Previously, the Financial Services Compensation Scheme (FSCS) only covered 100% of the first �2,000, and then 90% of the next �33,000.

BBA Chief Executive Angela Knight said increased costs resulting from further expansion to the FSCS would "inevitably" be passed on to customers.

"There isn't a money tree where you pick your �20 notes," she said.

"When the price of wheat goes up, you don't leave the price of a loaf unchanged."

There is nothing more important than introducing a scheme that will shore up the sentiment over savings Martin Lewis, moneysavingexpert.com

According to research carried out for the BBA by the financial consultants Oliver Wyman, 96% of consumer deposits are already covered by the present �35,000 threshold.

Increasing the limit to �100,000 would extend protection to an extra 1% of deposits, but would double the cost of the scheme, it found.

Consumer confidence

Consumer campaigners said it was essential that the government increased the protection for savers.

"After what's happened with Northern Rock, consumer confidence is at an all-time low," said Martin Lewis, from consumer website Moneysavingexpert.com.

"There is nothing more important than introducing a scheme that will shore up the sentiment over savings."

And he dismissed the warning that banks would pass on any increased scheme costs to customers by cutting interest rates on savings.

"Considering we are already in a highly competitive environment where the best savings accounts already pay more than the base rate, I think this is just balderdash and bluster from the banks."

In its response to the government's consultation on reforming the banking system after the Northern Rock crisis, the BBA called for an "open enquiry" into the recent financial turmoil.

It said this could help restore public confidence in the financial sector and the system whereby the Bank of England, the Treasury and the Financial Services Authority share regulatory responsibility.

Ms Knight said the banks supported the basic framework of the tripartite agreement but that it had clearly been "found wanting" during the Northern Rock crisis.