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BBA warns Darling deposit guarantee changes could harm industry

The British Bankers’ Association has warned the Government not to rush through proposals to reform the deposit protection scheme in the light of Northern Rock as it could create unnecessary industry burden without helping consumers.

In a letter to Chancellor Alistair Darling, BBA chief executive Angela Knight said it is important to make changes to the current system to boost consumer confidence.

But she said the American 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 UK insolvency law is different and so any changes in this area could have “significant consequences” with “careful consideration and analysis” required.

The letter said: “It would be a pity if too much haste resulted in a new deposit protection scheme that was unnecessarily costly or inappropriate for customers and the industry alike.”

The letter makes clear to the Chancellor that the industry had raised the current difficulties surrounding the money markets before the Northern Rock affair.

Knight said problems surrounding confidentiality of the Lender of Last Resort Facility, outlined at a recent Treasury select committee meeting by Bank of England governor Mervyn King, needed to be addressed urgently.

She also said more needs to be done to explain the meaning of the LOLR process to avoid public stigma.

The letter concluded: “The Northern Rock incident has unfortunately had a detrimental impact on the standing of the UK environment from an international perspective. It is a time of change both in the consideration of regulation across the EU and globally and it is disturbing that the UK voice may have been diminished at this time.

“The industry is ready to help in all areas covered in this letter and more. We look forward to an early meeting to discuss the issues that this incident has raised.”

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