Chancellor Alistair Darling came under attack from the City today after he said banks would not have to put up the money to protect savers in the event of another Northern Rock Fiasco.

Robert Jenkins, chairman of the Investment Management Association (IMA), said the Chancellor effectively admitted some banks were bust if they could not afford to pre-fund the depositor protection scheme.

Darling surprised the City and MPs yesterday when he announced the new scheme would, at least initially, be funded by taxpayers, not the banks. The scheme lifts the scale of savings protected from £35,000 to £50,000 and guarantees payouts within seven days.

Bank of England Governor Mervyn King has warned: "A degree of pre-funding is one of those ideas that is bound to be unpopular before the fund is called upon, but seems decidedly wise after the event as it lessens the burden on the banking system at a time of stress."

The IMA's Jenkins, writing in today's Financial Times, said: "The Chancellor is wrong. He is wrong that banks should not pay and he is wrong that they are too weak to pay. That they should pre-fund depositor insurance is obvious. Do you wait until an accident to pay your car insurance premium?

He adds that banks that require more capital to pre-fund should raise it.

"If their margin for survival is so slim, the Government is irresponsible to encourage them to lend and add to their exposures," he said.

"Let them fail."