'Fairer' treatment for depositors

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The government has outlined its plans for changes to the banking sector as part of the Queen's Speech.

Legislation will "ensure fairer and more secure protection for bank depositors", the Queen's Speech said.

There will be new powers for the Bank of England to provide short-term lending to banks in trouble without telling anybody.

A new savings scheme for people on low incomes will see the government add 50 pence to every £1 saved.

HM Revenue and Customs will be given powers to run the so-called gateway savings accounts.

The government will add a maximum of £300 after the account-holder has been saving for two years.

Banking regulation

The government needs to establish a permanent way of dealing with bank collapses that goes beyond the emergency measures it brought in to deal with Northern Rock which will expire in February 2009.

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It will create a new system for taking over failing banks.

There will be a Special Resolution Regime that will allow the authorities to sell a failing bank to another bank, to nationalise it or to transfer it to a bridge bank controlled by the Bank of England.

The bill would also deal with what compensation, if any, shareholders would receive under such circumstances.

Decisions would still be taken by the Bank of England, the chancellor and the Financial Services Authority.

New powers

But the Bank of England's role is strengthened, as it is to be given an explicit brief to maintain financial stability, including the creation of a new Financial Stability Committee.

In addition, the Bank will be able to make short-term loans to banks in trouble without having to disclose publicly that it has done so.

The Bank of England complained about its inability to do this to help rescue Northern Rock.

There will be also changes to the Financial Services Compensation Scheme (FSCS) that will allow it to pay out to savers in collapsed banks more quickly.

The reform will involve banks making bigger annual contributions to the scheme, as happens in the United States, instead of being asked for money each time a bank collapses.

All of these changes to banking regulation were initially proposed in May, and draft legislation was introduced in October in the House of Commons.

However, there was no mention in the speech of measures to encourage banks to resume normal lending practices something the chancellor has argued is imperative in return for the Treasury's cash injections into the banking system.