If Northern Rock was a 4 biliion £ basket case once all the debits and credits were balanced, what about banks like HBOS that are maybe 20 times larger?

Wouldn't the £50 billion + be too great for the govt to bear? This would require income tax increases to cover it! Surely it would, in the circumstance, be politically expedient to reduce depositor compensation?

The way I see it is the government will have to fully compensate all savers up to £35k or Nationalise any bank which is going under.
The reason for this is simple. Just imagine a bank going under. Not your bank but another bank. Then imagine the government saying, sorry guys but we cant afford to compensate any savers at that bank as we aint got any money.
What would your reaction be? You would go (or at least try) and withdraw all your savings wherever they may be to protect yourself in case your bank goes under. Of course everyone would do the same and the whole system would collapse in days. There would soon be no food in the supermarkets and we would soon all stop going to work.
Before long we'd be relying on food aid being dropped from planes from other countries.

unfortunately, in the real world, this bail-out might add 10p in the £ to taxes, so bailing out less than 100% might be fiscally tempting to reduce the burden??

So we have a choice of paying an extra 10p in the £ or the total collapse of the banking system as we know it. The total collapse in the banking system would mean the total collapse of all businesses that pay for things and take payment in £ ie all UK business.

Or are you saying that you would not withdraw all your savings if it turns out there is not a full guarantee?

more likely funds are frozen, promise made to pay depositors back in 6 months, dithering ensues, in the end money is dribbled back bit by bit and perhaps not completely.

take your point about banking collapse, but I am not sure, if the non-payment of depositors' losses is delayed then this is NOT the same as , at the moment, the expectation existing that they will be paid back in full, ie preventing runs happening RIGHT NOW (I would make this promise myself, it is essential, if possibly untrue)

I realise the promise needs to be made, but over the many months that it could take to deal with compensating depositors, if the contagion in the banking system is dealt with over the immediate future, then following this, risks of runs having subsided, it could be tempting for the govt to pay back somewhat less of what people feel they are owed.

It would have to be more than "dealt with". It would need to 100" bullet proof before people could be less than fully compensated without causing massive bank runs.

On the other hand, if the government can blatently lie about compensating people and get away with it then surely people can blatently lie on their self assessment tax forms etc. Another reason why the government wouldn't dare to not fully compensate people.
Trust in other words. It is what the whole economy is based on.

agreed, I don't have much trust left do I!