Darling sets out banking reforms

Chancellor Alistair Darling has set out proposals to give savers who lose money from a bank going under compensation within a week.

The government is seeking to strengthen the financial system following the first run on a bank in almost 150 years caused by savers rushing to withdraw their money from the troubled Northern Rock last year.

It said on Tuesday that enabling people to have quick access to their savings was "crucial" for them to be able to carry out everyday financial transactions, such as paying bills.

Under the current system it can take several months to process claims when a large institution fails.

The Financial Services Authority has been asked to consult on increasing the current limit for compensation from £35,000, to a likely new limit of £50,000.

But the government has stopped short of calling for the Financial Services Compensation Scheme to be pre-funded.

The banking industry had warned this would divert capital away from the banks at a time when they are under pressure from the credit crunch.

Instead, the scheme would be allowed to borrow money from the public sector to pay it to savers quickly.

The proposals set out by Darling follow a consultation document published in July, and will be followed by a further period of consultation.

The government plans to introduce legislation this autumn.

Despite not calling for the compensation scheme to be pre-funded, it intends to include powers in the legislation that would allow ministers to introduce a pre-funded element if this was thought to be appropriate.