Collapsed banks should compensate customers

Updated 14.35 Tue Jul 22 2008

Keywords: MPs, Bank of England Governor Mervyn King, Northern Rock

The Bank of England's governor Mervyn King has said that banks should pay money up front into a fund aimed at compensating customers when a bank collapses.

Mr King said he would expect the depositor protection fund to accumulate "many billions" of pounds over ten years, with contributions from lenders based on how risky they were.

Mr King said he would expect the depositor protection fund to accumulate "many billions" of pounds over 10 years, with contributions from lenders based on how risky they were

He was speaking to the House of Commons Treasury Select Committee, which is investigating a series of banking reforms proposed by the Government in the wake of last summer's Northern Rock collapse.

They include raising a Government guarantee level for customer deposits from £35,000 to £50,000, enabling customers of a failed bank to gain access to their accounts within seven days, and creating a Special Resolution Regime which would make it easier for regulators to take control of a failed bank.

Such measures would have made an "enormous difference" had they been in place at the time Northern Rock ran into liquidity problems last summer, he said.

The episode sparked the first run on a UK bank since Victorian times, with queues of people outside Northern Rock branches withdrawing money.