Banks should pay billions into protection scheme to avoid another Northern Rock crisis, says Mervyn King

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High Street banks should be forced to pay billions of pounds into a disaster fund to protect savers from another Northern Rock-style collapse, the Governor of the Bank of England said yesterday.

In comments that put the Bank on a collision course with the Treasury, Mervyn King called for leading banks to contribute to a fund that could build up over a decade to be worth 'many billions' and would be drawn upon in future collapses.

He told MPs on the Treasury Select Committee steps must be taken now to prepare for future financial crises, because they happen with 'depressing regularity' and 'there are very few tools to deal with greed and hubris, and excessive optimism and exuberance'.

But his proposals for protecting household savings clash with those put forward by Chancellor Alistair Darling, who has suggested the burden should initially be borne by the public purse with the money claimed back from the banking industry afterwards.

The Treasury is proposing that compensation for depositors in failed banks be increased from £35,000 to around £50,000.

Treasury minister Kitty Ussher hinted it might be possible to move to a pre-funded scheme when the current financial crisis eases.

Crisis: Northern Rock customers staging a run on the bank last year. Mr King said the new measures would have made a huge difference to the stricken lender