The Bank of England governor also said that the fund should be worth billions of pounds, in order to help depositors whose bank collapses.
Savers should have the added protection of a new compensation fund, the governor of the Bank of England has said.
Speaking to MPs at a Treasury Select Committee meeting yesterday, Mervyn King said that the banks themselves should donate money to the new, multi-billion pound compensation pot. Customers whose bank collapses, taking away their savings, would then be able to claim back their money from the fund.
Mr King also indicated that the Bank should be able to force emergency measures in order to prop up failing lenders: a significant strengthening of currently-proposed legislation, which merely allows the bank to recommend such measures to the City watchdog, the Financial Services Autority.
"We will not have the right to initiate the trigger," he said. "We will have the right to make a written recommendation to the FSA so that they pull the trigger. That's clearly not the same thing."
Referring to the proposed compensation pot, Mr King added: "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."
New legislation relating to the banking system and protection of savers' deposits will be introduced in a new parliamentary Bill later this year.
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