Banks reject saver deposit plan

Alistair Darling's plans are not popular with the banks

The UK's banks have rejected one of the government's main ideas for protecting savers' money if a bank goes bust.

The British Bankers Association (BBA) says the proposal for a beefed-up deposit protection fund to repay savers' cash is "irrelevant".

The banking body also says that new insolvency rules designed specially for banks might be too complex.

The BBA was responding to a formal government consultation on new bank rescue procedures launched in January.

It supports the government's general aim of improving ways to stop another run on a bank, like the one suffered by Northern Rock last year.

But the BBA warns that the 29 proposed legal changes and 23 other policy initiatives in the consultation document are fraught with difficulty.

"The complexity and range of issues contained in the consultation raises the real risk of adverse unintended consequences if changes are rushed," the BBA said.

"We therefore believe reforms should be phased, in order to reduce this risk," it added.

Fund

The BBA argues that setting up a pre-funded deposit protection scheme, rather like the US Federal Deposit Insurance Corporation (FDIC), is "neither workable nor relevant in the UK market".

How precisely will their property rights be affected and what compensation arrangements, if any, will apply? BBA

Instead, it wants the current Financial Services Compensation Scheme (FSCS) to have the powers to borrow enough money to compensate bank savers.

It also complains that if ordinary savers end up becoming preferred creditors in a new insolvency regime for banks, this would risk disadvantaging other potential creditors.

Among them might be shareholders, bondholders, other financial institutions which had lent a bank money, and corporate customers.

"How precisely will their property rights be affected and what compensation arrangements, if any, will apply?" asked the BBA.

Protection

The BBA claimed that favouring ordinary customers too highly might drive business away from the UK banking industry.

And it argued that the best way to protect savers would be to stop another Northern Rock-style near-collapse happening in the first place.

That would involve deeper supervision of the banking industry by the Financial Services Authority and the Bank of England.

However, the BBA does agree that there is scope for a higher level of compensation from the FSCS than the current limit of �35,000.

The government's consultation ends on 23 April.

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