Break the self-fulfilling cycling that is reducing banks' ability to lend

Explainer: David Cameron's three-point plan

How the Tory leader wants to protect Britain from some of the fallout created by the credit crisis

• Deborah Summers, politics editor
• guardian.co.uk,
• Tuesday September 30 2008 15:34 BST
• Article history

David Cameron wants to:

Pass legislation to protect failing banks

The Conservatives have today agreed to back government legislation that would enable the Bank of England to rescue failing banks while giving the Financial Services Authority the power to decide when a bank needed to be rescued.

The Tories had wanted the Bank of England to have control of both decisions, believing it to be best placed to deal with ailing institutions in a responsible way.

However, Cameron said today that what mattered was getting the legislation through quickly so the Conservatives will support the bill and may return to the FSA issue at a later date.

The new legislation will mean that if a bank runs into financial trouble, it will be the institutions that lent it the money, rather than taxpayers, that would have to shoulder the loss. The government will reserve the right to nationalise banks as a measure of last resort.

This is what George Osborne, the shadow chancellor, meant yesterday when he said there needed to be a half-way house between finding a private sector solution for a failing bank, which may not always be possible, and wholesale nationalisation.

Accelerate legislation to protect people's savings

The Conservatives want the government to rush through new legislation to increase protection for savers. Under the current rules, only the first £35,000 of an individual's money is fully protected should a bank collapse and is not paid out for at least six months.

The chancellor has announced that this is to be increased to £50,000 and should be paid out much faster. The Tories want the money repaid within seven days and are hoping the legislation will be passed without delay.

Usually there is at least two weeks between the first and second reading of a bill in parliament but the Tories have agreed for this to be cut to one week in this case.

Break the self-fulfilling cycling that is reducing banks' ability to lend

A European Union directive passed in 2001 and adopted as a new accounting standard in the UK in 2006 dictates that banks have to value their assets on a daily basis. To do this they must base their calculations on the market value of each asset if it were liquidated that day. The problem with this is that as share values tumble in response to the credit crisis, millions of pounds are wiped off bank balance sheets causing a spiral of decline in asset values.

The Tories are calling for a three-month suspension of the regulation to ease pressure on banks. It would be possible, in the first instance, to do this without seeking Brussels' approval because the original directive is much broader than the standard adopted by the UK, although EU approval would be sought at a later date.