UK chancellor to 'bite bullet' with £100,000 guarantee for savers

UK chancellor Alistair Darling said that he was considering guaranteeing people’s savings held in a bank or building society up to £100,000 (€143,404) in the wake of the Northern Rock crisis.

In an interview with The Times, Mr Darling said: “This is a bullet that needs to be bitten”.

Bank of England Governor Mervyn King identified the current system – where there is a 100% guaranteed on the first £2,000 (€2,868) and 90% on the next £31,000 (€44,455) – as one of the reasons for the run on the Northern Rock.

Giving evidence to the Commons Treasury Committee on Thursday, Mr King said that it was “logical” for savers with more than £33,000 (€47,323) to rush to withdraw their money once they saw the bank was in trouble.

According to The Times, Mr Darling is considering moving to an American-style system where savers’ money is separated out in the event of a bank collapse and paid out within days.

It will form part of a wider package of financial reforms to be announced when the Commons returns next month following the party conferences.

Mr Darling said that the international “credit crunch” caused by the collapsed of the US sub-prime mortgage lending market which triggered the problems at Northern Rock had been a “major upset”.

“What’s happened in America, and what’s now affecting countries all over the world is a major shock to the system. Its effects have been felt here, in the Far East, and we have to deal with it,” he said.

He also expressed optimism about the state of the housing market in the UK.

“I take the view that the slowing of house prices and ensuring that they are based on reality is not a bad thing. It is in no one’s interest for house prices to go on rising year after year when that is not justified,” he said.

Northern Rock has been forced to borrow around £3bn (€4.3bn) from the Bank of England in the past week, it was also reported.

The Financial Times published the figure which it said was gleaned from the Bank’s weekly balance sheets.

A spokesman for the Bank would not confirm the report.

“We have been no commenting on that all day,” he said.