Laiki Bank, also know as the Cyprus Popular Bank, is due to be closed as part of the restructuring plan by the Cypriot authorities but the Chancellor has said the Treasury was working towards a British solution for the small number of branches in the UK.

Osborne said: “It [the bailout] has not been well handled over the last few days, but you have to respect the fact that it’s a newly elected president facing incredibly difficult decisions.”

The Chancellor said the UK did not have prior knowledge of the original plan to impose a bank levy, which would have seen small depositors effectively charged 6.75% of their deposits to fund the bailout.

However the original proposals have been dropped. Had the measure been imposed, Osborne said ‘very considerable damage would have been done to the principle of deposit insurance’.

The Government has also written to pensioners in Cyprus and phoned them about the current situation and given them the opportunity to switch pension payments into a British account, Osborne said.

British military bases in Cyprus have been sent over another €13m (£11m) to help cover costs while the Cypriot banking system remains shut until Thursday.

Osborne told the panel Laiki Bank depositors are covered by the UK deposit insurance scheme – the Financial Services Compensation Scheme, which covers deposits of up to £85,000.

However, only depositors who opened an account in the UK are covered by the FSCS.

Depositors with more than €100,000 in Cypriot banks potentially face losses of up to 40% as part of a bailout for the island.