BRITAIN’s biggest banks have called on the government to tear up new legislation designed to prevent a repeat of the Northern Rock collapse.

A new “special resolution regime” has been drafted by Whitehall to lay out the framework for future financial crises. In its current form, the new laws would give the Treasury the right to cherry-pick assets from troubled financial institutions.

The move, which has emerged on the anniversary of the run on deposits at Northern Rock, is intended to give additional protection to savers. However, the banks have warned that this structure would make it almost impossible for any institution under suspicion to raise capital in the financial markets.

Creditors would have no idea which assets would be available to support their investments, the banks have warned. And it would lead to the markets charging UK banks higher interest rates for access to capital to account for the additional uncertainty.

The legal profession is up in arms at the proposed moves, which threaten the fundamental principles of UK company law and the ranking of creditors in any receivership or administration.

The criticisms have emerged in response to a government consultation on the new rules, which closes tomorrow. The new legislation is required to replace the temporary legislation introduced to execute the nationalisation of Northern Rock — which becomes null and void next February.

Angela Knight, chief executive of the British Bankers Association, said: “While we agree with the broad-brush principles behind all this, there are some very serious issues that have emerged in this consultation.”

Bankers are describing the new legislation as the most comprehensive change to UK banking laws ever witnessed, which the government is attempting to force through under the pressure of a deadline.

A recent note on the proposals sent to clients of law firm Allen & Overy warned that the changes pose a “loss of legal certainty” which “may damage confidence in the UK banking sector”.

The controversy over the structure of the legislation comes amid a simmering row over the government’s plans to increase the limits on the deposit protection scheme. The move would see savers in any banking collapse compensated for deposits worth up to £50,000, against £35,000 at present.

Although banks are backing the move in principle the government is still threatening to create an emergency fund to cover the costs, which would be funded by contributions from all the large banks.

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