Radical powers that will enable the Treasury, Bank of England and the Financial Services Authority to take control of a failing bank will be proposed today in a package designed to prevent a repeat of the Northern Rock debacle.

The reform of the current tripartite system of banking regulation will make the Chancellor the key decision-maker in any future crisis, with the power to overrule the Bank and the FSA if required.

Alistair Darling is suggesting a mechanism modelled on the “Cobra” system for dealing with terrorist attacks and civil emergencies. Under the system the various authorities give their advice but the final power rests with the Prime Minister or Home Secretary.

In proposals to be consulted on for 12 weeks before legislation is pushed through Parliament in the summer, Mr Darling will suggest that banks in distress should no longer be treated like any other companies.

He will say that if a bank such as Northern Rock fails it has implications for the whole economy. Therefore the Treasury, Bank and FSA should have additional powers to allow them to intervene.

In an extreme situation the authorities could intervene - with the Treasury taking the lead - to take control of a division or all of a bank to help to provide stability and reassurance and order a restructuring. The package envisages that the FSA would then appoint a restructuring officer - like a company doctor - who would be in place to help an ailing bank.

Under the system, depositors in a collapsed bank or building society would be paid out within a week of it closing, rather than having to wait months or years for compensation.

As an early warning system, banks will be required at short notice to give the authorities details of their liquidity to reduce the likelihood that they will get into trouble. At present the focus is on a bank's capital assets.

After changes to the deposit protection scheme in October investors are now guaranteed 100 per cent compensation for their savings up to a total of £35,000. Previously they were granted 100 per cent protection for £2,000 and 90 per cent protection for the next £33,000.

Today Mr Darling will ask the industry for its views on whether that figure should be raised but he appears to have backed away from the possibility that it could be as high as £100,000, a figure that would be highly unpopular with the banks.

Treasury officials said last night that 97 per cent of deposits were completely covered by the £35,000 guarantee.

Tory tactics

— Conservative plans for reforming the financial supervision system, to be announced today, include:

— Preemptive powers for the Bank of England to deal with failing banks, including a system of “prompt corrective action” and a special regime to ensure that deposits are ring-fenced when a bank is taken into administration

— A system of deposit insurance for retail deposits up to £50,000

— An eight-year nonrenewable term for the Governor of the Bank

— The Deputy Governor with responsibility for financial stability must have practical financial markets experience

— Reforms to the system of appointments to the MPC in order to make them more transparent

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