Northern Rock saga prompts new framework for banks in distress

11 October 2007
A new discussion paper focusing on a reform of the ways banks in distress are dealt with was introduced by Chancellor Alistair Darling in Parliament today.

Following the aftermath of Northern Rock’s recent struggles, a new reform, including arrangements for depositor protection, is being called for. The discussion paper, which was published jointly by HM Treasury, the Financial Services Authority and the Bank of England, aims to promote financial stability, competitiveness and consumer confidence.

Economic secretary to the Treasury, Kitty Ussher, said: "To maintain trust in the financial system, consumers want to be sure that they will be able to get their money back in a timely fashion if a bank were to run into problems.”

“They also want to know that they will continue to have access to day-to-day banking services with strong safeguards in place, at least until they can transfer services in an orderly way,” she added.

The paper states that any reform introduced on the back of this paper must ensure that consumers are confident that they are protected by a reliable guarantee which will take effect as soon as problems arise, and that the framework – including funding arrangements – offer full transparency.

Furthermore, the reform must ensure that critical banking services for retail, business and wholesale customers in times of trouble would be in place for as long as is needed to allow an organised transition to an alternative banking provider. The paper states that the reputation of UK financial services must be preserved and that taxpayer interest must be protected.

The discussion paper marks the first stage of discourse with stakeholders, and the Government plans to follow up with a consultation document in early 2008.

Ms Ussher said that, although the paper is open for discussion before any legislation is passed, she made it clear that: “It is in all our interests that the framework for depositor protection delivers an orderly and transparent process with a better protection scheme as its foundation.”

Find out more about banking and investment

© Fair Investment Company Ltd