THE chancellor, Alistair Darling is planning to give the Financial Services Authority (FSA) more power to deal with failing banks in the hope of avoiding another Northern Rock-type catastrophe.

He has said that he wanted to let the FSA seize and protect customers' cash if their bank got into difficulty and that he would also give power to ensure that banks in trouble have enough day-to-day cash to keep going.

It seems that he is unhappy with the considerable power exerted by shareholders in the Northern Rock crisis and his proposed changes will see the removal of their powers if a bank has to ask for funds from the Bank of England in the future.

The new legislation, planned for May, following a three-month consultation would also see the introduction of a new Cobra-style or emergency cabinet response unit - similar to that employed for terrorist incidents - to deal with any future financial crises.

He said that he planned to "give the FSA the powers that it needs".

Angela Knight from the British Bankers' Association broadly welcomed the proposed measures but called for closer consultations with the banking industry.

She said: "Early intervention has to be right when a financial institution gets into difficulty.

"These are technical areas and we have to get them right."

Separating failing parts of a bank from the healthy parts and possibly moving all deposits to another bank that is not in trouble are amongst the powers Mr Darling is considering giving the FSA.

Asked about how he planned to change the protection that savers received, he said he wanted "to make sure there is no doubt how much money is guaranteed... and also to make sure people can get out their money fairly quickly".

Mr Darling said that he was planning to make some changes to the current tripartite arrangement, under which crises are dealt with by the FSA, the Bank of England and the chancellor, but added there was "nothing fundamentally wrong" with the system.

The governor of the Bank of England, Mervyn King, has complained that the existing system did not give any of the three institutions the powers they needed to prevent the run on Northern Rock.

Goadsby group chief executive and finance director David Errington welcomed the chancellor's comments but highlighted certain caveats:

  • Response Unit. "The introduction of a new Cobra-style response unit is welcomed, but it would need to be staffed by the right calibre of people with the appropriate balance of financial expertise and commercial experience and sensibility."
  • Separation Of Deposit. "One of the greatest powers Mr Darling seeks to give the FSA is the ability to separate out the healthy parts of a troubled bank and move depositors to another bank as soon as possible.

"If this had been the case with Northern Rock, the depositors' savings would have been taken swiftly by the FSA.

"Mr Darling said they would have been repaid relatively quickly, safeguarding confidence in the system."

  • Stricter Rules On Bank Liquidity. "This would appear to be the most positive element. The reason why Northern Rock got into trouble was because it still had the traditional building society system of borrowing short' and lending long'. A lack of confidence means that short-term sources of finance dry up very quickly. A greater degree of control of banks' liquidity and earlier warning signs would be beneficial.

"A return to the good old financial principle of matching long-term assets with long-term liabilities would be beneficial. The financial institutions would not grow as much but a more prudent regime would then be generated."