Britain’s biggest banks warned the Government yesterday not to make its new deposit-protection scheme for savers too expensive after it emerged that an American-style system would cost the banking industry as much as £14 billion.

In a letter to the Chancellor yesterday, the British Bankers’ Association complained that the Northern Rock debacle had damaged the UK as an international banking centre. But banking sources said yesterday that the stricken Newcastle bank’s fate would be decided in less than a month, with buyers from around the world circling for a chunk of the business.

The Government was forced to guarantee £28 billion of deposits in Northern Rock, after the biggest bank run in living memory saw £2 billion stripped from its coffers in less than a week.

It emerged last night that Northern Rock last week distributed almost £40 million in dividends to holders of preference shares, two days before it decided to axe the interim dividend to ordinary shareholders, saving about £60 million. The bank could only have deferred the preference payout if it had given notice at least three weeks before the September 21 due date.

Alistair Darling promised permanently to strengthen the protection offered to British savers if a bank went bust. At present, there is just £4.4 million set aside by the Financial Services Compensation Scheme to pay back bank customers and banks do not contribute to the scheme.

Mr Darling is examining the US system, to which banks contribute 1.25 per cent of their retail deposits. Analysts at UBS calculated that the same level of protection would cost UK banks £14 billion. Even spread over five years, banks would face a £3 billion annual bill. “Building a scheme is likely to be expensive for the banks in its early years,” UBS said.

Angela Knight, chief executive of the BBA, said: “It would be a pity if too much haste results in a new deposit protection scheme that was unnecessarily costly or inappropriate for customers and the industry alike.”

In yesterday’s letter, the BBA intimated that it had warned regulators and the Bank of England of the credit crunch that last month paralysed markets around the world, but that they had been slow to react.

The BBA called for changes to financial services regulations governing liquidity risk management — a key problem at Northern Rock, which was unable to carry on doing business because it could not raise money in the wholesale markets to fund its operations. Analysts at Jupiter Asset Management yesterday estimated that Rock had borrowed £7.75 billion from the Bank since its loan was announced.

The BBA’s letter also demanded the re-examination of legislation that prevented the Bank of England from lending secretly to banks — the public nature of Northern Rock’s emergency loan sparked a run on the company’s accounts.

“The Northern Rock incident has unfortunately had a detrimental impact on the standing of the UK environment from an international perspective,” the BBA said.

A spokesman for the Chancellor said yesterday that Mr Darling would “respond in due course” but sources said that the Treasury was determined not to rush out a new deposit protection scheme.

Goldman Sachs is advising the Government on implications of its promise to protect Northern Rock savers. The investment bank is also likely to advise ministers on the potential sale of Northern Rock. Meanwhile, Merrill Lynch is advising the Northern Rock board on the possibilities of a disposal.

US debacle defence

–– In the US, holders of checking (current) or savings accounts are entitled to 100 per cent of up to $100,000 (£49,000) of their deposits if their bank melts down

–– Savers typically receive their compensation after three days, compared with the six months that it can take in the UK

–– US compensation is paid from a fund that presently totals about $49 billion. The equivalent UK pot has £4.4 million ($8.9 million)

–– The scheme, run by the Federal Deposit Insurance Corporation, was set up as part of the Glass-Steagall Act of 1933, in the wake of the Great Depression

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts