Chancellor reviews loan protection scheme

by Gill Montia

Story link: Chancellor reviews loan protection scheme

The Chancellor of the Exchequer, Alistair Darling, is considering a wide range of financial reforms in response to the difficulties experienced by Northern Rock, which had to be rescued by the Bank of England following a run on the bank.

The existing UK deposit protection scheme guarantees 100% of the first £2,000 of a saver’s money and 90% of the next £31,000.

These protection limits have recently been criticised by the Bank of England Governor, Mervyn King. He described the actions of Northern Rock savers with over £33,000 in their account as “logical”.

However, Mr Darling is now proposing to extend the scheme to safeguard up to £100,000 in savings.

The Chancellor is reported to be looking in particular at the Federal Deposit Insurance Corporation (FDIC), which exists in the US and protects savings of up to $100,000, in the event of a bank or similar savings institution become insolvent.

The FDIC is funded by a levy on the banks and if a similar scheme were to be introduced in Britain, HSBC, RBS, Barclays, HBOS and Lloyds TSB would be most likely pay the greatest amounts, because they hold the largest deposits.

According to the Chancellor, some of the changes now being discussed were already being developed before Northern Rock savers began queuing to collect their life savings.