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Prefunding of UK bank failure payouts unlikely

British banks are unlikely to have to come up with money upfront to fund a compensation scheme for bank failure victims under reforms to be announced by the UK Treasury.

Bank executives have been worried they might have to pay out billions of pounds into a deposit protection scheme at a time when their balance sheets are under strain because of the global credit crunch.

Finance Minister Alistair Darling told a parliamentary committee earlier this year that he did not think it was right to take money from the banks when they were trying to rebuild their capital positions.

A source familiar with the banking reform package to be unveiled told Reuters that Darling's view remained the same.

Currently, savers have up to 35,000 pounds of their deposits protected if a bank goes under through a scheme financed by the industry.

But there have been calls to raise this amount to 50,000 pounds following the collapse of mortgage lender Northern Rock last year, which triggered Britain's first bank run in more than a century.

The Treasury's consultation document is expected to leave the option of a pre-funded scheme open for future years.

Banks would prefer to pay for a compensation scheme if and when it was needed and want to make sure the amount protected is capped at a reasonable level.

The consultation document is also expected to spell out the circumstances in which the government would take control of a failing bank.

The Bank of England will also be given a new statutory remit to protect financial stability under the proposed reforms, Darling has said. (Reuters)