Why we need a banking bill

Why we need a banking bill

The banking reform bill announced by Gordon Brown today was prompted by the collapse of Northern Rock, which exposed significant problems with the current system.

It is intended to make it easier for the authorities - the Treasury, Bank of England and Financial Services Authority - to intervene when a bank gets into difficulty and also make the financial system safer for consumers by strengthening the current Financial Services Compensation Scheme.

The cornerstone of the proposal is the creation of a special resolution regime, which will give the authorities new powers to respond to a bank in crisis. This special resolution regime would allow the FSA could seize a bank's assets and secure depositors' savings to prevent a Northern Rock-style run on a bank.

This addresses the fact that in the past the only way the government could tackle a troubled bank was through insolvency laws.

The proposals are not without their critics, however. The Association of British Insurers, whose members control around a fifth of the stock market, fear that the reputation of the City could be damaged if the regulators took control of a bank's assets too quickly. This is because shareholder rights could be destroyed if deposits are seized.

The government is pledging to consult before pushing through any laws.

Expanding the compensation scheme is meant to prevent worried savers starting another run on a UK bank. Thousands of people besieged Northern.....continued below

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Rock branches last September because they would only have received a maximum of £31,700 if it had gone into administration, and could have faced a long wait for a payout. The limit was increased to £35,000 last October, and chancellor Alistair Darling has reportedly been considering raising the limit to £100,000.

guardian.co.uk © Guardian Newspapers Limited 2008