Bank of England chief backs pre-paid compensation fund

23 July 2008

UK banks should be forced to pay in to a compensation fund for savers who lose money in collapsed institutions.

This is the proposal of Bank of England governor Mervyn King, who also said yesterday that the fund should run into the billions of pounds.

Mr King's remarks were made to a group of members of the British parliament, in the run-up to the introduction of new banking legislation later this year.

UK lender Northern Rock was an early victim of the credit crunch, when the government was forced to intervene to save it from collapse last summer.

The run on the bank was the first such instance in Britain for over 100 years - and has since caused savers' compensation laws to be reviewed.

Mr King said: "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."

The central bank governor also said that the institution should be allowed to instigate emergency measures itself in order to prop up failing banks under future legislation.

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