Alistair Darling confirmed yesterday plans to increase the guarantee on depositors' savings to £50,000 if their bank fails, but said that the bill would be met initially by taxpayers, not by the industry.

The increase from the existing £35,000 is an attempt to give consumers more confidence in the banking system in the event of another Northern Rock-style collapse.

Yet rather than ask the banks to pre-fund the deposit - as in the United States - the Chancellor said that he was not proposing to introduce such a scheme immediately, although he kept the door open for the future.

Instead, if a bank fails, the Government will use taxpayers' money to pay out the deposits within seven days. Then it will claw back the funds through a sale of the banks' assets - a process than can take months or years - as well as a levy imposed on other banks.

The £50,000 figure is below an original estimate of £100,000 first mooted last autumn, although the Treasury said that Mr Darling had never formally proposed the higher figure.

Banks, which are trying to rebuild their balance sheets in the wake of the credit crunch, predictably welcomed the decision.

Eric Leenders, executive director of the British Bankers' Association, said: “We're pleased there's going to be a further period of reflection. This is the biggest change to banking regulation in ten years and we don't want to rush into it”.

Opposition MPs criticised the move. Vince Cable, the Liberal Democrats' Treasury spokesman, said: “The only way this can happen is for the banks to make 'up front' payments into the fund. We must be clear that deposit protection is the responsibility of the banks, not the taxpayer.”

Treasury officials said yesterday that the increase to £50,000 meant that 97 per cent of savings accounts would be covered by the guarantee, which is allocated per person, per bank.

Which?, the consumer watchdog, said that the proposals did not go far enough.

Vera Cottrell, its finance campaigner, said: “Payouts must be faster than the proposed seven days to minimise the disruption to people's lives.”

She also urged the Government to make the guarantee payable per brand, since some banks, such as HBOS, are effectively comprised of multiple brands - in HBOS's case Halifax, Bank of Scotland and Birmingham Midshires - and consumers could have savings with several.

Mr Darling disclosed his proposals as part of the next consultation phase for new banking legislation, which is due to come into force next February.

It also includes a shake-up of the Bank of England to give it a legal responsibility for financial stability and new powers for the Financial Services Authority that enable it to put a bank into bankruptcy if it fails to meet certain solvency and liquidity thresholds.

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