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Chancellor plans to guarantee savings up to £100,000

Chancellor Alistair Darling says he is looking at ways of guaranteeing people's savings held in any bank or building society account up to £100,000 in an overhaul of the banking system designed to prevent a repeat of the Northern Rock debacle.

“My job is to protect ordinary savers. So we need to strengthen protection for ordinary savers — to give them confidence, ensuring that their savings in a bank or building society are guaranteed,” he said.

In an interview with The Times newspaper, he said it was a "bullet that needs to be bitten" and the scheme would be paid for by a levy on banks and other financial institutions. It is one of several measures being considered which are designed to return confidence to the system and allow the Bank of England to carry out its role as a lender of last resort.

The Bank of England believes the current Financial Services Compensation Scheme (FSCS) which presently guarantees 100% of the first £2,000 and 90% of the next £31,000, contributed to this month's run on Northern Rock, says the Bank.

Governer of the Bank of England said it was "logical" for savers with more than £33,000 to rush to take their money out.

According to the Times, the chancellor is looking at an American style system, where savers' money is guaranteed and paid out days after a bank collapses, funded by a levy on banks and other financial institutions.

John McFall, chairman of the treasury select committee which is currently undertaking an inquiry into the stability of the UK's financial markets, said the current compensation scheme was "inadequate," and that the chancellor's proposals were a step in the right direction.

Angela Knight, chief executive of the British Bankers’ Association, suggested that £100,000 may be too large a sum to protect.

“We’re very much prepared to enter into a discussion on how to get this right,” she said.

“We need to look at the average amount in a deposit account because at the moment we are making policy on the hoof.”