British banks may not be too hot at managing risk, but they are brilliant at managing ministers.

After a textbook lobbying exercise, the Treasury has backed down from its threat to force banks to put money into a fund to compensate savers in the event of another Northern Rock.

It also appears likely that compensation will be capped at £50,000, rather than the £100,000 orginally mooted.

The Government has been convinced that it would take too long for a fund to be built to a sufficient size to deal with a big failure. Ministers also bought the argument that the banks are hardly in a fit state to find the money now.

So who will pick up the bill? The taxpayer, of course. Depositors will get compensation immediately from the Government, which will then attempt to claw back the money by a levy on banks and the sale of the troubled bank's assets.

The snag with this is that a bank failure is likely to come at a time when the entire banking system is under stress. This is precisely the wrong moment to ask banks for money or to sell bank assets. So the likelihood is that taxpayers would have to wait years to get the money back.

To be fair to the banks, there are some respectable arguments against the sort of pre-funded scheme that operates in the United States. Because America has thousands of small banks, which are the ones most likely to go under, it can get by with a relatively small fund.

Britain has a smaller number of larger banks, so the pre-funded scheme would have to be relatively much bigger. To have a huge sum tied up in a fund that might never be used would probably not be the best use of bank capital.

The banks also opposed any increase in the present cap of £35,000. This is in line with limits in other countries and would cover 96 per cent of deposits by number.

But there are more big bank deposits in Britain than the US. Here, the £35,000 limit would cover only 49 per cent of deposits by value and for a £50,000 cap it would be only 57 per cent.

If one of the aims of a deposit protection scheme is to prevent bank runs, the £50,000 limit looks too low.

In an interview with The Times last September, Alistair Darling, the Chancellor, said that a cap of £100,000 was possible, though no figure had been set. He appears to have been convinced that a higher figure would impose too onerous a cost on smaller banks and building societies.

There is, of course, another argument against setting the cap too high. By removing risk from savers, it reduces their incentive to punish reckless managements by taking their cash elsewhere.

With luck, savers will not forget one lesson of the Northern Rock debacle: if a bank looks too good to be true, it probably is.

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