The Governor of the Bank of England put himself on a collision course with the high street banks yesterday by calling on them to put billions of pounds into a consumer compensation scheme.

Mervyn King used the British Bankers’ Association (BBA) conference, attended by the chief executives of the country’s three biggest banking companies, to suggest that banks make upfront payments to a new scheme to compensate savers who lose money in a bank collapse.

Mr King admitted to the 350 delegates that his suggestion would be unpopular, but described it as decidedly wise. “Some element of prefunding is natural,” he said.

The BBA’s members are desperate to avoid paying upfront into a new compensation pot. Banks, already liable for levies of up to £4 billion a year to an existing compensation scheme, want to provide fundings as and when the scheme needs to make payouts, rather than allow it to sit on a pot of ready cash.

Despite Mr King’s plea, Angela Knight, the BBA’s chief executive, yesterday insisted that prefunding was not essential. “[More] relevant is that people get paid out quickly and that they’ve got confidence in the system,” she said. The Treasury will consult later this summer on compensation scheme funding.

Mr King also told the conference that he was working on a permanent liquidity facility to replace the three-year £50 billion facility announced in April to help to ease the credit crunch. The new regime could replace the current overnight standing facility that is snubbed by banks that fear the stigma of borrowing from the central bank.

To introduce a new facility, Mr King would have to alter the Bank’s Red Book, which sets out how the central bank conducts monetary policy. The Governor said that he would announce the changes this year. It is one of a series of reforms that have come in the wake of last year’s credit crunch, which led to the near-collapse of Northern Rock, the Newcastle bank, amid a freeze in interbank lending.

Banks around the world have taken almost $400 billion (£204 billion) in writedowns and made more than 80,000 job cuts as a result of the crunch, starving much of the industry of the cash needed for day-to-day business. The Royal Bank of Scotland, HBOS and Bradford & Bingley recently announced rights issues to repair their damaged balance sheets.

Speaking at the BBA conference, Stephen Green, chairman of HSBC, Europe’s biggest bank, said that he did not believe that the crisis was over yet and acknowledged that the banking industry had not covered itself in glory. Mr Green said, however, that the banks had abandoned business lines requiring huge leverage. “It’s not the end of a bubble, it’s the end of a business model,” he said.

The Basle Committee on Banking Supervision, which coordinates activities of central banks and financial regulators around the world, is due to consult on liquidity issues next month. However, Sir Callum McCarthy, chairman of the Financial Services Authority, told the BBA that he would not wait for Basle’s suggestions to press ahead with changes to the rules for British banks. “Unless there’s a step change in the speed with which the Basle Committee progresses international agreement, regulators will be forced to deal with this on a national level,” he said.

In another attempt to restore stability to the banking system, the BBA set out reforms to the calculation of the London Interbank Offered Rate (Libor), the interbank lending rate used to set the price of $35,000 billion worth of financial products. Three-month sterling Libor yesterday had its biggest increase in a month, moving to 5.95 per cent, from 5.91 per cent on Monday, because of the prospect of interest rate rises and banks’ continued reluctance to lend.

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