Credit is rooted, quite literally, in the Latin credo “I believe”. Chapter 1 of any monetary textbook explains that a bank run of the kind we have seen in the high streets of Britain can be stopped only by creating an absolute belief in the safety of the money in question.

In normal times, it is enough for people to believe that their savings are reasonably safe on the balance of probabilities, barring some unexpected calamity and with a decent reward, via the rate of interest, for the very small risk they accept.

But once a bank run has started, such conditional belief is no longer good enough. Rational people will not leave their money – any money – in a bank whose credit is evaporating before their eyes. Something dramatic has to happen to make them feel absolutely, and not just conditionally, secure.

This was the dire situation that some policymakers, bankers and commentators recognised over the weekend and was formally recognised by the Chancellor yesterday afternoon. Alistair Darling, Gordon Brown and Mervyn King will doubtless be attacked in the weeks ahead for risking public money, underwriting imprudence, fomenting moral hazard and creating an unnecessary crisis.

But at least they cannot be criticised for hiding their heads in the sand or being paralysed by fear, like John Major in the somewhat comparable circumstances of Black Wednesday, exactly 15 years ago. The Government has acted in time to avert a catastrophe of Black Wednesday proportions. Having failed to reassure savers on Friday morning with the announcement of a credit line from the Bank of England, the Chancellor has bitten the bullet immediately, providing all the security that any depositor in a British bank could possibly ask for. This was far better – and will certainly entail less risk for the Exchequer – than the incremental alternative of offering gradually stronger, but still contingent or ambiguous reassurances, which the markets would have thrown back in his face.

But even if the Government’s decisiveness yesterday deserves some plaudits and will probably ensure that this crisis is resolved without taxpayers having to bear any actual costs. This near-catastrophe should be seen as the start, not the end, of a serious debate about the institutions that supervise Britain’s financial services and the competence of the people in charge.

The first item to debate will obviously be the causes of the Northern Rock crisis. For Mr Darling to pretend it was a pure accident caused by the problems of the US mortgage markets is not good. A serious and critical examination must now be undertaken of the Financial Services Authority’s regulatory arrangements and of the monetary management by the Bank.

Even more urgently, however, the Chancellor must explain in detail why he really had no alternative to the sweeping guarantees he offered in this case – and what he will do to prevent similar situations arising in future bank crises, since these will inevitably occur from time to time. The answers to both these questions revolve around a problem which has scarcely been mentioned so far in the Northern Rock crisis but is actually more important than all the discussions about moral hazard and imprudent lending by banks. This problem is the archaic and self-defeating system for insuring bank deposits in Britain, which the Bank of England has been trying to reform for years, but with no success.

Probably the main reason why the original efforts to save Northern Rock were such an instant failure was the blatant contradiction between the Government’s promise of unlimited support from the Bank of England and the details of the official deposit insurance arrangements. This states that only the first £2,000 of deposits were guaranteed fully with a guarantee of only 90 per cent up to £35,000 and nothing beyond that. Which of these stories were savers supposed to believe? Britain is the only major economy in the world where bank guarantees are so weak and arrangements for repayment of larger deposits are left entirely undefined and at governments’ discretion.

It is now time to move towards a system similar to those in the US and much of Europe, where deposits up to around £100,000 are fully guaranteed by compulsory insurance schemes, funded by the banking industry. If an insurance scheme were established with such reasonably high limits, then depositors of larger sums could be treated in the same way as commercial creditors and offered no protection at all.

But what about the vexed question of “moral hazard”? Surely that is the real issue raised by yesterday’s bailout and talk of a more generous deposit guarantee scheme would send exactly the wrong messages – encourage even further the imprudent lending which is said to be at the root of this mess.

That analysis is simply wrong. Support for depositors will neither reward nor encourage future lending excesses, provided the shareholders who are ultimately responsible for Northern Rock’s misjudgments lose all or most of their investments and the company’s managers and directors lose their jobs.

Provided those conditions are satisfied, protecting the broader economy from financial disaster is infinitely more important than puritanical vindictiveness after the harm is done.

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