The ’lender of last resort’ is set to become a victim of the Treasury’s urgent review of financial supervision in the wake of the Northern Rock crisis – as a phrase if not a concept.

The government believes the panic reaction to the news that the Bank of England had agreed to act in that capacity to Northern Rock, creating a run on the bank, means no other institution will want to be tarred with the same brush.

A different description of the Bank’s support function – intended to reassure savers rather than alarm them – is being considered by officials, according to government insiders.

The agonising over semantics illustrates the complexity of the task facing the government as it seeks to produce reforms that can be implemented rapidly, but without creating unintended consequences in the long term.

Insiders say they are well aware of the risks of creating the “Northern Rock equivalent of the Dangerous Dogs Act”, the notoriously bodged legislative response to a media demand for action. Ministers stress they will resist repeating what is seen as the US’s error in imposing unnecessarily burdensome regulation on the financial services industry, such as the Sarbanes-Oxley regime. But the government also knows it needs to act quickly to maintain savers’ confidence in the system.

The Treasury’s planned approach to reforming the deposit protection scheme illustrates how ministers may try to reconcile these conflicting demands. Alistair Darling, chancellor, has sought to reassure savers by pledging to look at introducing a US-style insurance system, allowing very fast pay-outs, covering 100 per cent of deposits up to a limit of about £100,000.

But introducing such a system would almost certainly involve time-consuming changes to highly complex insolvency laws. It also faces opposition from the banking industry, which could succeed in slowing its legislative path through the Lords.

The government intends to address this by fast-tracking changes to the existing scheme as a stop-gap measure. A number of changes to the scheme, including an increase in the existing £31,700 cap on compensation, could probably be implemented without primary legislation, according to experts.

The British Bankers’ Association, which has commissioned lawyers to review urgently what changes can be made without new laws, told the FT it backed the “pragmatic” approach of trying to improve the existing scheme rather than rushing to put a brand new one in place.

The banks would have to pay more to increase the existing cap on the scheme, which is at least partly funded upfront. But the sector recognises some change is now inevitable, while warning of the complexities of trying to design a new scheme.

“We’re not in favour of a US-style approach – it would affect very considerably a number of areas, such as insolvency law,” Angela Knight, the association’s chief executive, said on Monday.


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