Bank of England may be allowed to secretly help banks

The Bank of England could be given powers to offer secret financial help to failing banks under plans outlined today, to avoid a repeat of the Northern Rock debacle.

British Chancellor Alistair Darling is proposing to allow disclosure of emergency funding to be delayed where it may help prevent a Northern Rock-style retail run on a bank by panicked savers.

The British government has also suggested a "special resolution regime" to take control of a failed bank under the proposals unveiled today, including part-nationalisation.

Mr Darling has launched a three-month consultation on the changes, which would see a radical reform of banking regulations.

Savers could get greater protection over their deposits in a potentially pre-funded deposit guarantee scheme, which could see banks having to cough up billions of pounds in upfront levies.

More freedom may also be given to the Treasury, Financial Services Authority and the Bank of England to help prevent and address future bank failings.

The "tripartite authorities" have been blasted by MPs over their handling of the Northern Rock crisis, which led to the first run on a UK bank in nearly 150 years.

A report from the Treasury Select Committee criticised the FSA for a "systematic failure of duty" over the beleaguered mortgage lender because it failed to spot its "reckless" business model.

Bank of England Governor Mervyn King - reappointed today for a second five-year term - also came under attack for failing to act when the credit crunch first began to bite in August.

The disclosure of Northern Rock's need to call on the Bank as lender of last resort was heavily scrutinised by the committee in sparking the devastating retail run.

The Chancellor's regulatory overhauls would see the Bank able to offer financial support with a "period of non-disclosure".

It is also proposed that the Bank would have a more formal role in maintaining financial stability, with a renewed focus on co-operating internationally with fellow central banks.

Mr Darling said: "Recent months have seen a period of sustained turbulence and instability in global financial markets, with financial firms across the world affected.

"A response to these episodes requires action, not only from the UK authorities, but also from international firms and institutions."

He added: "The Government is determined that its response is proportionate and appropriate and will therefore consult actively on these proposals, seeking discussions with financial institutions, consumer representatives and counterparts from across the world."

The British government is proposing new rules to part-nationalise a failing bank, with a publicly owned "bridge bank" set up to take over some or all of a failed bank's assets and liabilities, while a "restructuring officer" could be parachuted in.

Mr Darling's plans also to propose to increase the scope of the depositor protection scheme, which currently guarantees the first £35,000 (€47,000) of savings.

Compensation may be paid out faster to depositors under the plans, within one week of a bank collapsing.

Alongside more powers for the Bank of England, the plans propose giving the FSA the ability to demand information from banks at short-notice, in particular on liquidity.

The British Bankers' Association said it had already raised many of the issues in today's proposals and would "work closely" with the British government.

It added: "The aim must be to end up with a regime which protects the customer while allowing banks to continue to operate effectively and competitively in the global marketplace."