Alistair Darling is planning to guarantee people’s savings held in any bank or building society account up to £100,000 in an overhaul of the financial system designed to prevent a repeat of the Northern Rock fiasco.

In an interview with The Times at the end of a week of turmoil, the Chancellor of the Exchequer disclosed that he was looking at giving Britain a US-style system of savings protection, under which deposits held in a collapsed bank would be moved into a special vehicle and paid back to savers within days.

The scheme, paid for by a levy on banks and other financial institutions, would be one of several measures to return confidence to the system and allow the Bank of England to carry out its role as a lender of last resort.

Hedge funds and other investors have made £1 billion in profit over the past few months betting that the Northern Rock share price would fall, one prominent fund manager estimated yesterday. Philip Richards, co-founder of RAB Capital, who snapped up a 6 per cent stake in the bank this week, said that some hedge funds were adding to the panic by driving bank share prices lower, and gave warning that they would be encouraged to pick on other banks if Northern Rock were allowed to fail.

In his first interview since the run on Northern Rock, Mr Darling promised to set out his plans to the Commons when it returns early next month.

He told The Times that he was considering: Early changes to the existing Financial Services Authority (FSA) deposit protection scheme, increasing the limits from a 100 per cent guarantee on the first £2,000 and 90 per cent on the next £31,000. There was no doubt that the scheme was inadequate, and that the large number of people with savings in excess of that figure needed to be offered greater safeguard, the Chancellor said; A more fundamental overhaul of the system towards the American practice of separating savers’ money in the event of a collapse and paying it out within days. The Government had not fixed a figure but Mr Darling said that £100,000 was possible. He added that setting such a level would also encourage big savers to spread their money around; “This is a bullet that needs to be bitten.”

Changes to regulation to bring in far greater transparency and prevent big investments being hidden off the balance sheet, and to enable people to know the risks to which they were exposed; Putting more focus on banks’ liquidity as well as their solvency. Northern Rock had been considered solvent but it had big liquidity problems; Requiring regulators to focus on banks that seemed to be doing very well as well as those doing badly. Often it was “good” banks – he mentioned Barings – that surprised people by having problems;

Changes to the Bank of England’s lender-of-last-resort system so that an institution would not be dissuaded from applying for help by the fate of Northern Rock. It was because Northern Rock had been revealed as seeking help that the queues started and other banks might be deterred in future.

Picking up on the suggestion by Mervyn King, the Governor of the Bank of England, that a covert operation might have worked, the Chancellor suggested that deals in smoke-filled rooms would probably lead to leaks and suspicion and that he was in favour of transparency in any case.

However, he added that a “more generalised system of bank support”, under which banks routinely applied for assistance as they were entitled to do at present, might be preferable and avoid the “opprobrium” that could attach to a bank in the spotlight.

In a wide-ranging interview Mr Darling disclosed that he had not been able to announce the 100 per cent guarantee for Northern Rock savers until Monday evening because of a range of factors. The Times has learnt that one of these was that another institution – Lloyds TSB – had been taking an interest in the company but had decided not to go ahead.

He said that some of the changes would take time. “I would say we need to think first and then act. You need to ensure that whatever you do makes the system better.”

The Chancellor declined to say if he would be recommending Mr King for a second term as governor next year. The decision did not have to be made until much nearer the time but he made plain that he had voiced his backing for Mr King.

Throughout the interview the Chancellor accepted that the credit crunch had been a “major upset”, saying: “What’s happened in America, and what’s now affecting countries all over the world, is a major shock to the system. Its effects have been felt in here, in the Far East, and we have to deal with it.” But he added that the British economy was strong and had proved capable of withstanding many shocks.

In addition, there was every reason to be optimistic about the housing market. “I take the view that the slowing of house prices and ensuring that they are based on reality is not a bad thing. It is in no one’s interests for house prices to go on rising year after year after year when that is not justified.”

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