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‘Banks warned against rushing cash protection reforms’

The Government came under heavy fire last week, with the heads of both the British Bankers’ Association and the Confederation of British Industry slamming it over its role in the Northern Rock fiasco.

In a letter to Chancellor Alistair Darling, BBA chief executive Angela Knight warned the Government not to rush through proposals to reform the deposit protection scheme as it could create an unnecessary industry burden without helping consumers.

Knight said the US system, much quoted as a possible replacement for the current scheme, benefits from a legal system that allows authorities to take intervening action in a bank early, such as freezing deposits.

She warned that UK insolvency law is different and any changes in this area could have “significant consequences”. Knight said problems over confidentiality of the lender of last resort facility, outlined at a recent Treasury select committee meeting by Bank of England governor Mervyn King, also needed to be addressed urgently.

However, CBI director-general Richard Lambert said
the events were a failure of the tripartite arrangement between the Bank of England, the FSA and the Treasury which was designed to maintain financial stability

Speaking to business leaders at the CBI North-east annual dinner, Lambert said the tripartite had “been found wanting under fire” and a run on a bank might be expected in a “banana republic” but was “unimaginable” in the UK.

He said: “It is not enough to say, as the governor did last week, that the main difficulties in fixing the problem had been created by the complexity of today’s company law and by our system of deposit guarantees. You do not wait for the cinema to catch fire before you check out whether the fire precautions are going to work.

“Now the Government has two ways of restoring normality to the UK’s banking system. Either it can underwrite bank savings, which would generate heavy-handed regulation, kill competition and punish innovation, or return to a world where market forces operate.”

An FSA spokesman says: “Clearly, following recent events, the authorities will be looking at what measures can be taken to build confidence and see what lessons can be learnt.”

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