A senior member of the Bank of England today said the preparation of “living wills” so banks can be wound down when they hit financial trouble would lead to “better fire prevention and better fire-fighting”.

Andrew Bailey, executive director for banking services and chief cashier, said Recovery and Resolution Plans “should be critical tools for banks themselves, banking supervisors and resolution authorities”.

He told a banking conference in Madrid they would make bank rescues “more straightforward and less costly” by “creating a permanent state of readiness”.

They would also deal with firms which are “too complex to resolve”. Bailey said such a plan at Northern Rock could have prevented the collapse of the bank and its multi-billion pound rescue by the taxpayer.

It would have forced Northern Rock management and regulators to examine the bank's prospects in the event that the credit markets seized up and its customers cannot repay loans. Bailey said: “We cannot justify having a banking system that depends on the use of public money to douse the fire when the crisis comes.

“And we also cannot allow conditions to exist where risks are taken on the basis that this backstop exists.”