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| BankruptcyNews |
Posted - 12 October 2007 : 12:21:10
Plans for quicker bank bail-outs
New measures to rescue insolvent banks quickly have been floated by the government following the recent run on the Northern Rock bank.
The Treasury has suggested ensuring quicker payouts than those likely under the existing savers' protection scheme.
Another idea is to raise further the savings sum guaranteed, up from the recently agreed new level of £35,000.
Chancellor Alistair Darling told the Commons that he wanted to protect savers money if their bank failed.
"This regime would mean depositors are insulated from a bank that has failed, greater compensation for them and certainty their compensation can be paid out quickly," he told MPs.
Mr Darling declared a member's interest - that he had a Northern Rock mortgage - before making his statement on the Northern Rock crisis.
The Treasury, Bank of England and Financial Services Authority (FSA) have started formal consultation on ways to improve the UK's system of protection for savers if their bank goes bust.
At the start of the month, the chancellor raised from £2,000 to £35,000 the amount of money a saver would get back in full if their bank collapsed.
It is clear that the authorities are particularly worried that the recent crisis at the Northern Rock bank could have spilled over into other sections of the financial services industry.
"Recent events have demonstrated the importance of depositor confidence if institutions are to weather periods of financial instability," said the official discussion paper.
"Unless there are robust mechanisms to shore up depositor confidence, the risk of instability can be exacerbated," it added.
Special administration
One idea floated by the government in its document is that a new system of administration should be set up just for insolvent banks.
That would mean an administrator could be appointed under special rules to sort out a bank's problems more quickly than would be likely under the present insolvency laws.
At the moment, if a bank in the UK went bust, savers might find their money frozen for weeks or even months while insolvency experts tried to rescue it.
Adoption of the US insurance system to protect savers' money seems unlikely.
That would involve the establishment of a very large insurance fund which might not be used for a very long time.
However, the Financial Services Authority is already planning to beef up the existing UK Financial Services Compensation Scheme (FSCS) so that it has a capacity of just over £4bn.
The government suggests that a special form of administration for insolvent banks might also help maintain "critical banking functions" for customers, such as direct debits and the use of cash machines, while a bank is being rescued.
Source: bbc.co.uk
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