Mervin King, governor of the Bank of England, has told the banking industry that they should pay up to fund a compensation pot, in advance of an institution going under.

In the wake of Northern Rock's collapse, and several larger failings in the US, Mr King suggested that UK banks should fund a collective pot that could be accessed immediately to compensate consumers if an institution fails.

However government ministers, concerned about the struggles already faced by the banking industry, have said that the scheme should only go ahead with a market consensus.

Angela Knight, chief executive of the British Bankers Association, voiced her dissatisfaction with the idea that more ''risky'' institutions should have to pay more up front.

"How is riskiness assessed?" she asked in the Financial Times.

"Are big institutions classed as risky because they have a large number of customers even though they are well capitalised? Or are smaller banks regarded as riskier even though they have fewer customers."

The government yesterday issued a separate report on the how shareholders should be looked after better in the event of another failing bank.