Savers have never been more important for banks. Banks are battling to attract retail deposits because the credit crunch has dried up other forms of funding. So important is this battle that governments are now joining in.

The Irish Government announced yesterday that it would guarantee all deposits in its six biggest financial institutions, including Bank of Ireland and Allied Irish Bank, for two years. If any of the banks got into difficulties, savers would be sure to get their money back courtesy of the Irish taxpayer.

Great news for the Irish banks. Less good for the British banks that compete with them. The branches of British banks in Ireland cannot offer the same guarantee. But the British branches of Irish banks can. Some of the Irish banks have big operations in Britain, including Bank of Ireland, which owns Bristol & West.

The British banks are worried that they will lose savers to the Irish and are pressing the Government to match the Irish guarantee. Gordon Brown said yesterday that there were no plans to do so, though he was careful not to rule it out.

One British bank, Northern Rock, does have that unlimited guarantee, because it is now owned by the Government. But savings with other banks are guaranteed only up to £35,000. Beyond that there is only an implicit guarantee that savers would be protected, which was issued at the time of the Northern Rock collapse.

The truth is that it is politically inconceivable that the Government would allow any retail depositors in a British bank to lose money.

But this has not been enough to reassure all savers, as was seen in the case of Bradford & Bingley. Some depositors rushed to take out money amid media reports of its problems, although the rescue ensured that no one lost a penny however large their savings. By preventing such potential bank runs, an explicit guarantee would remove one of the risks hanging over even the most solid lenders.

The Irish Government said that it would guarantee not only retail deposits but also money lent to its banks by other institutions. Investors had been concerned that other lenders were getting nervous of putting money into Irish banks. Their share prices collapsed on Monday and recovered yesterday after the announcement.

So should the Government boost confidence in British banks by making the implicit guarantee explicit? Ministers are cautious for a couple of reasons. For a start, it is unclear whether it would be allowed by Brussels, which is looking at the Irish move. There is also the potential risk to the public finances, which could increase government borrowing costs and even put pressure on sterling.

Sceptics say that there are unlikely to be problems with Brussels and that the move would have little impact on borrowing costs or the currency because the implicit guarantee is there already.

Some think the Government is simply keeping its powder dry. If Congress fails to agree on the bank bailout and there is a new wave of panic, No 10 may want something in reserve to bolster confidence in the British banking system.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive