UK authorities act to shore up financial system

By Steve Slater and Christina Fincher

LONDON (Reuters) - British authorities announced three separate initiatives on Friday to get the cogs of the financial system turning again.

None of them was as sweeping as the $700 billion bailout proposed by the United States or the blanket guarantees offered in Ireland, but they underlined Britain's acknowledgement of the gravity of the crisis and the need for action.

Britain's Financial Services Authority (FSA) raised the compensation limit for savings to 50,000 pounds ($88,390) per customer claim from 35,000 pounds, after signs bank customers were withdrawing cash to put into perceived safe havens.

The higher limit will take effect from next week and could be further increased as regulators battle to restore confidence in the banking sector.

The Bank of England announced it would extend the range of collateral it accepts at its weekly three-month cash auctions to include some highly-rated corporate and consumer loans -- just the sort of stuff that has been clogging up bank balance sheets.

"In these extraordinary market conditions, the Bank of England will take all actions necessary to ensure that the banking system has access to sufficient liquidity," said BoE Governor Mervyn King.

Lastly, Britain's Debt Management Office announced a special facility to promote the orderly functioning of the gilts market. In recent days, there has been a rush into the safety of short-dated gilts leading to strains in the market.

"They're pulling out the stops to try and solve the problems in the interbank markets and it's another step in that direction," said Paul Dales at Capital Economics. "They've got quite a lot of ammunition in their hands and they are slowly releasing it as the events warrant."

The government established a National Economic Council to coordinate economic policies across government and help people cope with the fallout from the financial crisis.

The council, chaired by Prime Minister Gordon Brown with finance minister Alistair Darling as his deputy, will meet often and take advice from experts on issues ranging from financial markets, global commodity prices, sustainable energy and barriers to business.

CONFIDENCE KEY

Several countries have attempted to restore confidence among savers this week amid a credit crisis which has raised fears that more bank failures could result in savers losing money.

The FSA said the new compensation ceiling would take effect from Oct. 7 and customers with joint accounts will be eligible to claim up to 100,000 pounds.

"The Chancellor has made clear that the authorities will do whatever is necessary to maintain financial stability and protect depositors," FSA Chief Executive Hector Sants said in a statement.

The British Bankers' Association welcomed the move and said it "will bring welcome certainty for customers" and cover about 98 percent of customers.

But the share of savings in value covered by the scheme is far lower. About 40 percent of all UK deposits are over 50,000 pounds, according to Jonathan Pierce, analyst at Credit Suisse, who said a modest rise would therefore do little.

The FSA said it would consult on further reforms, including "considering whether the compensation limit should be higher still." Other reforms could include cutting the time it takes to pay out compensation and clarifying the legal status of claims.

British bank shares surged shortly after the announcements, although the rally was mainly due to news that U.S. banks Wachovia WB.N and Wells Fargo (WFC.N) are to merge, dealers said [nN03460047].

(Additional reporting by Myles Neligan and Dominic Lau; Editing by David Holmes and Andy Bruce)