Britain will guarantee all existing deposits at embattled mortgage bank Northern Rock, finance minister Alistair Darling said on Monday.
Customers of the bank have rushed to withdraw money from their accounts after it sought emergency help from the Bank of England last week as fears grow that a global credit crunch could develop into a banking crisis.
Should it be necessary, we, with the Bank of England, would put in place arrangements that would guarantee all the existing deposits in Northern Rock during the current instability, he said in a statement.
This means that people can continue to take their money out of Northern Rock, but if they choose to leave their money in Northern Rock it will be guaranteed safe and secure.
Currently, an industry-funded scheme protects 100 percent of the first 2,000 pounds ($3,990) in any bank account and 90 percent of the next 33,000 pounds, giving a maximum payout of 31,700 pounds.
Darling said he had taken the decision to extend that protection because of the importance I place on maintaining a stable banking system and public confidence in it.
He said the cost of safeguarding the deposits, if required, would come from the company's assets and repeated that Northern Rock was solvent and no other bank had sought help from the central bank.
There is money there, as I have made clear over the last few days to meet the obligations the bank has. In the event that we had to go further than that, then we would recover any money that was paid out from the assets of the Northern Rock bank, he said.
On Monday, shares in lender Alliance & Leicester fell more than 30 percent as bank shares continued to suffer in the wake of the Northern Rock crisis.
A Treasury official said if another bank were to arrange an emergency lending facility with the BoE and were declared solvent by the Financial Services Authority, the government would be willing to extend its full deposit guarantee plan.
The official added the government would not stand in the way of any sale of Northern Rock although the bank has said it is not currently in talks with any other party.
Darling's comments followed a meeting with U.S. Treasury Secretary Henry Paulson in which ways to improve transparency in financial markets and cross-border co-operation dominated.
We look forward to discussing all of these issues at the IMF meetings in Washington next month, Darling said.