King calls for billions in bank guarantees

Mervyn King today said banks should put "many billions" of pounds into a fund over the next 10 years to compensate customers in case of another Northern Rock collapse.

The Bank of England Governor told MPs banks should pay into a fund before a financial disaster rather than after it has taken place. he said the lack of a 100% cash guarantee of savers' money contributed to the run on Northern Rock last year because customers were scared they would not get their money back.

The Government eventually promised customers would not lose a penny no matter what happened to the stricken Newcastle lender, which was nationalised after months of wrangling.

King was speaking to members of the house of Commons Treasury Select Committee on the issue of banking reform. The Government has proposed a series of new measures in the wake of the Northern Rock debacle.

Asked how much banks should contribute to the depositor protection fund, King said: "Something that would amount to a non-negligible contribution. Over 10 years you would have to build up a fund of many billions." he added: "The Bank's view is that an element of pre-funding will be a desirable part of the scheme. If you wait until there is a problem, that's a rather bad time to ask banks to put up money."

King also said banks should pay a contribution "which reflects the riskiness of the bank". The Financial Services Compensation Scheme currently guarantees the first £35,000 of savings each person has at a bank, but King said a 100% guarantee for up to £50,000 was "very sensible".

"It is shortsighted to say that the banks shouldn't be asked to put money in now," he said. he added that the Bank should have the power to initiate state help for failing banks. Under current proposals, it would only be able to make a recommendation to the Financial Services Authority.