Under the Financial Services Compensation Scheme the first £50,000 of any deposit is protected if a bank fails

The UK government is withdrawing its unlimited 100% guarantee on savings with Northern Rock, moving the state-controlled bank another step closer to independence.

The Treasury announced this morning that its pledge to underwrite all deposits at the bank will expire on 24 May. This will bring Northern Rock into line with the rest of the UK banking sector, and follows complaints from rivals that it had an unfair advantage.

City minister Paul Myners said that the move demonstrated that Northern Rock has returned to a stronger financial footing since being nationalised two years ago.

"Over the last two years, we have worked to get the bank back to financial health. We have taken a number of important steps, most recently to divide the bank into a retail business that will be sold back to the private sector in due course, and an asset management company that will remain in government ownership," said Myners.

"Our goal is to see the taxpayer get a good return on its investment in the bank and for Northern Rock to focus on providing an excellent service to its customers."

The guarantee on Northern Rock deposits was introduced on 17 September 2007, in an effort to calm the panic that saw tens of thousands of savers descend on Northern Rock branches after it sought help from the Bank of England.

Under the Financial Services Compensation Scheme - which was beefed up after the financial crisis began - the first £50,000 of any deposit is protected if a bank fails.

Today's announcement affects people with variable rate savings accounts. Those who currently hold a fixed-rate product with Northern Rock, such as a savings bond, will continue to enjoy 100% protection for the lifetime of the account.

Gary Hoffman, chief executive of Northern Rock, welcomed the government's move.

"This is another positive step in the right direction and the decision reflects our good progress and the strong capital position of Northern Rock," said Hoffman.

Mutual appreciation?

Mutual societies have complained that the unlimited guarantee gave Northern Rock an unfair advantage, allowing it to borrow money at a cheaper rate and offer better deals to savers. The Building Societies Association welcomed the removal of the guarantee, but warned that its members are still being penalised because they are not being directly supported by the state.

"Banks, NS&I and the Post Office all have significant public sector support. The guarantee has enabled Northern Rock to attract substantial inflows following the bank's nationalisation," said Adrian Coles, director-general of the BSA.

Coles is particularly concerned about NS&I, which offers premium bonds and holds a total of £94bn of savings.

"The government should also consider setting a negative, or at the very least zero, financing target for NS&I in 2010/11 to avoid further distortions from NS&I. We also call on the Treasury to ensure that the part-nationalised banks, Lloyds and RBS, do not operate in a way that distorts the savings market through their government ownership," Coles said.

Northern Rock has now been split into a "Good Bank" which will hold its savings deposits and offer new loans, and a "Bad Bank" which will be left with many of its legacy mortgages. The virtuous part is expected to be sold to a private bidder after the general election.

The Liberal Democrats, though, believe that Northern Rock could instead be "re-mutualised". Yesterday Vince Cable, the party's Treasury spokesman, argued that this would not necessarily prevent the taxpayer receiving a return on the billions used to save Northern Rock.

"Our objection has been that mutualisation of the nationalised banks does not produce the return of cash to the taxpayer, but we must remember Northern Rock is in a very different situation to Lloyds and RBS. £23bn of government money has been pumped into Northern Rock, vastly in excess of its market worth even at the height of the credit boom. There is no way this money will ever be recouped purely from a re-flotation," Cable said.