So what has gone so badly wrong, and how can ordinary small-time savers and borrowers be sure their money is safe?

Streetwise gives you a guide to what everyday bank savers are entitled to if the worst happens.

What went wrong?

In the US and the UK, banks had been lending large amounts of money to people with poor credit history, who were at risk of not being able to pay it back.

In the USA, it is thought around one-fifth of mortgages loaned were 'subprime'.

In the UK, Northern Rock's business model relied heavily on selling '120 per cent mortgages' – lending buyers up to 20 per cent more than the actual value of their house.

A large number of people struggled to pay back the money they had borrowed, and when the true extent of the bank's policy was exposed investors panicked and withdrew money, causing a collapse.

The latest casualty, Bradford and Bingley, had specialised in the buy-to-let market.

With a drastic drop in the value of property, and many landlords struggling to find tenants, many defaulted on their mortgages, causing a crisis in the value of the company, which led 'confidence' to plummet – banks are now less likely to lend to individuals, and each other.

But people do enjoy protection of their savings under law.

How can I be safe?

If the worst comes to the worst, legislation guarantees a minimum level of protection from services regulated by the Financial Services Authority.

The Financial Services Compensation Scheme runs a statutory programme called the Depositor Protection Scheme which guarantees savers most of their money back if a bank or building society collapses.

What can I get?

FSCS compensation rules cover all deposit accounts – including high-interest cash ISAs – for 100 per cent of their money, up to a maximum of £35,000, or £70,000 in a joint account with each individual bank.

If you had two accounts of £35,000 with the same bank, you would still only be covered up to a maximum of £35,000, so regulators advise savers to spread their accounts between different banks.

Thanks to takeovers and mergers some banks with different names are in effect the same bank under the terms of the compensation rules.

Anyone concerned about their cover should contact the FSA's advice line on 0845 606 1234.

What about other investments?

Bonds and Investment ISAs are regulated differently.

Investment ISAs, opposed to cash ISAs, are used for specific investments by the bank, and carry an element of risk – your investment could go up or down.

Bonds are covered in a similar way.