The government’s radical decision to bail out Northern Rock’s savers has highlighted the weakness at the heart of the current system for protecting savers.

By promising that the government will guarantee all the saving of customers at Northern Rock, Alastair Darling, the Chancellor of the Exchequer, has effectively admitted that the current rescue system does not provide an adequate safety net.

If sense prevails, the lessons learned during the current turmoil, will lead to root and branch reform of a system that has clearly lost the public’s trust.

The existing regime, called the Financial Services Compensation Scheme (FSCS), is funded by a levy on banks, insurers and fund managers and imposes strict limits on compensation. It offers full insurance only for the first £2,000 saved. Redress is limited to 90 per cent of the figure between £2,000 and £35,000, while anything over that amount is lost.

These limits have not been raised since 2001 and reform is now urgently needed. Extending the scheme to cover savings in full would probably be a step too far, but guaranteeing 100 per cent of deposits up to a higher figure would be both simpler to understand and fairer.

The National Consumer Council (NCC) reckons that full compensation should be offered for all savings up to £35,000, which would be more than adequate to cover most people’s savings.

Ed Mayo, NCC's Chief Executive said: “The race to withdraw deposits [at Northern Rock] shows that nerves are high and consumers want positive action as well as warm words. Giving 100 per cent backing for people's deposits up to £35,000 through the compensation scheme will give more confidence to consumers and make it less likely that the safety net is ever needed. “

There may be a case for an even higher compensation ceiling. In America the equivalent scheme, the Federal Deposit Insurance Scheme (FDIS), guarantees $100,000 (£50,000). The Financial Ombudsman Service, which provides redress against mis-selling and bad practice, can award up to £100,000.

It will certainly mean that the firms involved in the scheme will have to contribute more, but it is unlikely to cause too much pain. The more than £40bn made in bank profits in 2006 dwarf the £2.4bn contribution made to the scheme the previous year to cover depositors.

Just as importantly, the system needs to be speeded up. The current scheme can be painfully slow: the FSCS admits that compensation claims can take more than six months to process.

In contrast America’s FDIS has historically ensured that depositors can get their hands on their savings just a few days after a bank goes bust.

How? First, it puts savers at the top of the list of creditors. Second, it removes deposits from a bank and places them with another organisation setting up a new account that can be quickly accessed. If confidence is to be restored the UK’s system needs to be as quick and efficient.