In addition to the grave concerns regarding the security of deposits, the 'Savings Banks Deficiency' was a source of discontent for many Members of Parliament and other critics of the savings banks. The Select Committee made a number of recommendations, most of which were ignored by the Government when it passed a somewhat innocuous two-clause Act in 1860 that mainly dealt with the powers of purchase of investments by the Debt Commissioners.

The Government's indecision regarding the structure and security of the savings banks was matched by its response to the proposals for the establishment of a Post Office Savings Bank (POSB). The originator of the idea of using the Post Office to collect the small savings of people of small means was the MP Samuel Whitbread (of brewery fame), whose Bill of 1807 to establish such a bank predated Henry Duncan, but it did not reach the statute book. Other attempts to raise the issue did not bear fruit until the idea was taken up by Charles Sikes who popularised the idea between 1859 and 1861. The Chancellor of the Exchequer, William Gladstone, was favourable to the idea, particularly when a simplified plan to use passbooks was proposed, instead of a complicated system basis on the Post Office's Money Order procedures. As a concession to fears that the new bank would signal the end of the TSBs, Gladstone promised that facilities would initially be available in areas without savings banks, rather than through the entire network of some 2,500 Post Offices. The Post Office Savings Bank Act received Royal Assent on May 17th 1861, with accounts earning interest at 2½% against the rate of £2 18s. 4d. per cent paid by the majority of savings banks. The demise of the old savings banks was freely prophesised, and they were almost certainly faced with a struggle for survival.

Survival would depend on depositors having confidence in the security of their money, security that was easily obtainable from the Post Office Savings Bank. The question of security was again to the fore when the Bilston Savings Bank (in 1862) lost over £9,000 through a defalcation, by the vicar of the parish who was also a local Justice of the Peace. Surprisingly, by the end of 1863, when the POSB had been in operation for over a year, only thirty of the savings banks had closed, although many of the 638 TSBs were very small operations who were at risk from the competition of the POSB. Despite Gladstone's promise that the POSB would commence gradually, the number of Post Offices offering a savings account grew from 301 in September 1861 to 1,629 in December 1861, and 2,532 in December 1862.

But the Bilston defalcation, combined with the rapid expansion of the POSB, was the catalyst for many of the banks to agree to co-operate in the formulation of a new Savings Bank Bill. Agreement was reached that the liability of the managers and trustees should be restored to the pre-1844 position; that there should be a double check on all transactions; that passbooks must be compared with the ledger on all withdrawals and on its first production each year; that money was to be received only on bank premises and during bank hours; to the appointment of independent professional accountants as auditors who were to certify the annual accounts; to the extraction of a list of depositors' balances (identified by account number, not by name) certified by the auditors, and to be displayed in the appropriate branch; and managers and trustees to meet at least quarterly and to keep proper minutes of the meeting. The Act received Royal Assent on July 28th 1863.

Some clauses of the Act consolidated various Statutes passed since 1828. Annual deposit limits were fixed at the low amount of £30 per year, with an overall limit of £150; if principal with added interest reached £200, interest credits ceased. More generous limits applied to friendly societies, charities, and penny banks. The TSBs continued to enjoy exemption from Stamp Duty, and were allowed to deal with the accounts of deceased depositors with small estates in an informal manner. The Savings Bank Barrister (whose function was transferred to the Registrar of Friendly Societies in 1876) was confirmed as the official to deal with disputes.

The management of the banks was still left in the hands of the trustees and managers. Any persons might combine to form a savings bank in their locality, provided they obtained the permission of the National Debt Commissioners and agreed to abide by a set of rules certified by the Savings Banks Barrister as being in accordance with the Act. By 1863, the distinction between trustees and managers was not as clear cut as of old. It was now common for the trustees to act as a board of management - they were responsible for holding property, signing authorities, and submitting returns. Managers were gradually being replaced by paid officers to deal with day-to-day business. Most boards were representative of the best and most philanthropic men in the local community, although tradesmen, industrialists, and professional men had largely taken the place of the titled and landed gentry whose financial backing had once been essential.

The preceding paragraphs detail much of the resulting constitution, powers, and limitations of the TSBs which, subsequently, described themselves as 'certified under the Act of 1863'. By November 20th 1863, the number of TSBs was 603, having peaked at 645 in 1861 - the year that the POSB commenced business. Total deposits had grown from £14.6-million in 1830 to almost £41-million: