British money set to be lured by guarantee of Irish banks

BRITISH BANKING:REPORTS OF an ongoing flight to safety by British savers continued yesterday as President Mary McAleese signed the Government's bank guarantee scheme into law.

Irish banks now offering 100 per cent protection for depositors were among the safe-havens drawing anxious savers amid continuing pressure on prime minister Gordon Brown from the banking industry to follow the Irish lead and guarantee retail and wholesale deposits.

One online financial survey found one-third of those questioned opening accounts in the first two days of October tempted to take the Irish option, as the British Bankers' Association wrote formally to the Irish Government complaining about the distortion of competition.

Official figures showing the flow of money out of accounts on Wednesday are unlikely to be available for another 10 days. Apacs, the UK payments association, said no significant peaks had been spotted on transmissions through the Chaps transmission service. However, there were reports of billions of pounds being moved from high street banks, although it seemed clear this pattern to some extent predated the Irish Government decision this week.

Britain's own taxpayer-owned bank Northern Rock has found itself turning money away and has been forced to withdraw a number of savings deals for new customers to ensure it does not abuse its competitive advantage over other British banks.

The BBC's Robert Peston also reported the UK's National Savings Investments (NSI) - the people who sell premium bonds - overwhelmed by calls from savers preferring to lend their money to the treasury than leave it in the bank.

Earlier this week, the banks warned the treasury that it might find itself forced to follow the Irish Government's example and guarantee all deposits. But departing trade minister Lord Digby Jones yesterday underlined Labour government resistance to such a move.

He told BBC Radio 4's World at Oneprogramme: "If you ever guarantee anything, you have to assume one day you are going to get it called. You have got to bank and account on that basis. It would be trillions and trillions of taxpayers' pounds involved."

Mr Brown, chancellor Alistair Darling and Bank of England governor Mervyn King favour continuing with the present case-by-case approach to problems. Ministers fear a policy shift in favour of a package underpinning every UK bank could be counter-productive, provoke public panic and thus prove a self-fulfilling prophecy.

There appears to be no political head-of-steam building around the issue, with Conservative leader David Cameron welcoming the presumed planned increase in the amount of deposits guaranteed from £35,000 to £50,000. Analysts also believe Mr Brown's repeated promise to do "whatever is necessary" is an effective guarantee no British bank will be allowed to fall.

Downing Street confirmed yesterday it had been in "close contact" with the Irish Government about its bank guarantee scheme, and also in close discussions with partner governments and the European Commission.

A Guardianreport said Mr Darling had intervened twice this week to warn Minister for Finance Brian Lenihan the Irish scheme "was a problem for the UK". However, Mr Brown's spokesman would only say: "If there are any single market or state aid issues arising, that is a matter for the European Commission."

Mr Brown will travel to Paris for tomorrow's emergency summit convened by President Nicolas Sarkozy, although Downing Street made clear it did not anticipate any emerging proposal for an EU-wide bank bailout of the kind still under debate in the US.