Alistair Darling this morning announced that he would "stand behind" the British depositors of Icesave, the Iceland-based savings institution that went bust yesterday. This will win him some short-term glory with the 300,000 British savers who were attracted by Icesave's 6 per cent-plus interest rates, socking £4.5 billion into Icesave in the past two years. It is a travesty that Icesave's British customers will receive more than the £50,000 maximum promised to British savers under the current UK compensation scheme.

The truth is that Britain's Icesave customers had plenty of warning that Iceland was suffering economic problems. The Times wrote in July that savers might have little chance of getting their cash back from the woefully underfunded Icelandic deposit protection scheme, should problems occur. Icesave's customers took a risk in investing their cash in a foreign bank. They were rewarded for that risk with great interest rates.

By allowing more than the maximum compensation available to British savers, the Chancellor could be doing long-term damage to Britain's financial system. It is a green flag to every dubious overseas institution to sell their wares in the UK - because the Government has shown that it is ready to pick up the pieces. It will also cause the customers of Britain's banks to wonder why they should remain loyal to their local branch, where they receive much lower interest rates, when they could be receiving a much better return at apparently no risk to themselves.

Icesave's own website was somewhat misleading on the level of protection available to its overseas customers - it failed to mention that only the first €20,000 of any loss was covered by the Icelandic deposit scheme. There are undoubtedly lessons for the UK's financial regulator, which watched savers pile cash into Icesave yet appeared to take little interest in the risks it posed. But the public cannot be wrapped in cotton wool. We must do our own research and make our own calculated decisions about where we put our cash.

Gordon Brown said that by bailing out Icesave's UK customers, the Government was "showing by our action that we stand behind people who save". But by offering them more than £50,000 in compensation, it is not. Instead, it is using the tax money of less well-rewarded savers with British banks to compensate those who took a risk and lost.

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