The chancellor Alistair Darling will today put the Financial Services Authority at the heart of his plans to prevent another Northern Rock style bank collapse, despite criticism of the City watchdog's handling of the crisis by an all-party group of MPs.

Launching a 12-week consultation on his proposals, Darling will argue that the FSA needs extra powers to step in at an earlier stage when a bank gets into trouble.

The chancellor also intends to create a special insolvency regime for banks that will give the FSA power to extract depositors' cash from a failing institution. He will say the reform is essential to prevent a bank failure leading to queues at branches and further loss of public confidence.

The proposals are expected to win favour among City firms, which have shown little appetite for tearing up the current tripartite system of regulation co-ordinated by the FSA, the Bank of England and the Treasury.

However, the Conservative party, which is also launching its banking regulation reforms today, will call for the Bank of England to be given the lead role in a crisis. Echoing plans put forward over the weekend by the Treasury select committee, the Tories argue the only way to avoid another Northern Rock is to end the confusion over who is in charge when a bank signals it is in trouble.

The shadow chancellor George Osborne said the central bank's role as lender of last resort meant it was logical that the governor should direct rescue operations.

Darling said under his new insolvency rules the FSA could force a bank to sell part of its business, implement a restructuring or take control of its board to keep the bank from going bust.

The power to ringfence customer savings will be coupled with a financial compensation scheme that must repay deposits within a week. Darling will say he will consult on the maximum level of compensation to be paid, which was raised to £35,000 after the Northern Rock crisis.

Treasury sources said ministers were open to arguments that the level should be higher, though the current level covers 97% of all depositors.

Osborne said he wanted the level set at £50,000. He added that pre-emptive powers for the Bank to deal with failing banks was a necessary step towards more coherent regulation. He said the government should endorse the central bank governor Mervyn King who is expected to be reappointed in the summer.

The Treasury select committee said a crack team of senior staff was needed to handle future banking failures.


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