The Government today confirmed plans to increase the guarantee on depositors' savings to £50,000 if their bank collapses but said lenders will not have to pay billions of pounds upfront into a protection scheme.

Following the Northern Rock fiasco, the Government pledged to increase the guarantee on savers' money from £35,000 to £50,000. However, UK banks had been worried that, with their finances already under pressure, they would be asked to pre-fund the system.

The Government, rather than the banking system, will be underwriting a higher level of protection for consumers which will be set out in a consultation on banking reforms.

Alistair Darling, the Chancellor of the Exchequor, said: "No system of regulation can or should prevent the failure of each and every institution, but we must do everything possible to prevent problems which would pose a wider threat to stability.

"The challenge is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions. These proposals will give the authorities the full range of powers they need."

Northern Rock, which was taken into Government hands in February, became the highest profile UK casuaulty of the credit crunch.

It was forced to seek emergency funding from the Bank of England after the wholesale markets seized up in the wake of the sub-prime mortgage crisis in the US.

Northern Rock, which embarked on an overambitious expansion drive, was widely seen as culpable in its own demise.

Mr Darling, alongside regulators at the Financial Services Authority and the Bank of England, have been widely criticised for their failure to act swiftly and decisively over the bank's prablems.

The Government began a review of the existing protection scheme in January, having initially signalled that it would increase the limit to £100,000.

MPs had also been pushing for the scheme. The Treasury left the door open to embark on a pre-funded bailout plan for stricken UK banks in years to come.

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