Today's announcement on banking reform is, for the large part, a triumph for the lobbying power of Britain's banks.

The Treasury has backed down from its threats to pre-fund a compensation scheme for savers and looks likely to set the upper limit for compensation at £50,000, rather than the £100,000 originally mooted. Instead, taxpayers' cash will be used to pay compensation, then the Government will claw back the money via a levy on other banks and the sale of the troubled bank's assets.

Having a completely pre-funded compensation pot was not sensible for a number of reasons. Firstly, there are approximately £929 billion in deposits in UK banks.

Unlike the US, where there are more than 3,000 savings providers and no one bank is permitted to hold more than 10 per cent of the market's deposits, in the UK just four banks hold about 50 per cent of deposits. This means that any pre-funded scheme would have to be huge to protect consumers against a bank collapse. It may not have been the best use of such a large sum, which could otherwise have been used by the banks to make their products more attractively priced.

Secondly, pre-funding would have given National Savings & Investments, the Government savings scheme, which would not have participated in the scheme, an even greater competitive advantage against other banks.

Thirdly, research by Oliver Wyman shows that the current funding of the Financial Services Compensation Scheme, which can ask for up to £4 billion a year from the banks, is sufficient to cover the type of bank losses that occur only once every 250 years, so rare is such an occurence.

Lastly, now, with banks raising billions of pounds in cash to prop up their balance sheets, is not the best time to ask them for extra money. The Government's proposal does have holes. It may not be easy, in a disturbed market, to sell a bank's assets in order to recoup taxpayers' cash. But the Treasury has, effectively, been on the hook as a guarantor of every deposit in the UK ever since it agreed to protect those of Northern Rock customers. This will merely formalise the arrangement.

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