Savings of up to £1 million are to be protected under new rules proposed by the Bank of England.
The proposals are designed to avoid a Northern Rock-style run on a financial institution and will only apply to money temporarily deposited in an account, such as the proceeds from a house sale, and will last for six months.
Under current rules, the Financial Services Compensation Scheme (FSCS) protects £85,000 worth of savings if a bank or building society collapses, making the proposed limit a considerable increase. The new rules are due to come into force by July 2015.
On top of this, new measures on the transfer of accounts from a failed bank to a new provider will allow customers to withdraw their money within 24 hours, even if the bank has gone bust.
The moves are part of range of reforms designed to protect consumers. By 2019 banks must formally separate their retail business from their investment arm, with the Bank of England confirming this week that the retail business would be independent from the rest of the bank with a separate board, chief executive and chairman.
Andrew Bailey, deputy governor of the Bank of England said: "Improving the resilience and resolvability of firms has been at the heart of international and domestic reforms since the financial crisis.
"Ring-fencing will improve banks' resilience, by protecting them from shocks, and facilitate orderly resolution – both of which are needed for a stable financial system."