The Federal Government is expected to announce a new levy on banks set to start in 2016 to help fund any future bailouts.

The levy will start on January 1, 2016 and will be set at 0.05 per cent on deposits of up to $250,000.

It is understood the levy will raise $733 million in its first 18 months.

The money raised will go into a new Financial Stability Fund and will be used in the event of a bank collapse.

It would be levied on banks, not directly on account holders but it is expected bank's will pass that on to depositors.

Bank shares stumbled yesterday amid speculation the Government was considering the levy.

At the close of trade, shares in the Commonwealth Bank fell by 1.47 per cent, while ANZ lost 1.24 per cent and NAB 1.6 per cent.

But Westpac recovered most of its big losses to finish down 0.6 per cent, just two cents at $30.87.

Treasurer Chris Bowen held talks with the Australian Banking Association and credit unions in Sydney on Thursday afternoon to consult them on the idea of a deposit protection levy.

Mr Bowen pointed to a report from the International Monetary Fund (IMF) which he says highlights a gap in Australia's public policy when it comes to "provisioning for any potential bank or deposit-taking institution failure".

"I've been consulting with banks about how we make sure that there's money set aside in the unfortunate and very unlikely event that a deposit-taking institution in Australia comes into difficulty," he said.

In its latest report, the Reserve Bank puts the total amount of domestic deposits at $1.8 trillion, with $600 billion of that accounting for household savings.

Australian Bankers' Association chief executive Steven Münchenberg says the financial system is stable and he is disappointed with the Government's decision.

"We do expect that banks will pass this on to customers in terms of lower interest rates on their deposits," he said.

"If we don't pass it on to those customers with savings, then it will increase the funding costs of banks [and] there is the possibility that'll be passed on to borrowers."

Stability fund to appear as revenue

Space to play or pause, M to mute, left and right arrows to seek, up and down arrows for volume. Watch Duration: 8 minutes 17 seconds 8 m Government maps path to surplus on road to election ( Chris Uhlmann )

The ABC has been told the Financial Stability Fund will appear as revenue in the budget, as the Government grapples with revenue shortfalls ahead of releasing its economic update.

Finance Minister Penny Wong would not be drawn on whether the money raised would better off in a superannuation-like fund rather than appearing as revenue on the budget bottom line.

"The Treasurer today has referenced the fact that the IMF and the RBA have put a view to the Government about the need for a fund to cover deposit protection, and the Treasurer has made clear he's consulting on that," she said.

The anticipated budget update is expected as early as Friday, and it could clear the way for Prime Minister Kevin Rudd to make the trip to Government House and call the election.

On Thursday the Government also announced it would increase the tax on cigarettes in a move it said would help reduce the number of smokers while also providing revenue for the budget.

From December 1, the tax on tobacco will rise by 12.5 per cent each year for four years, raising $5.3 billion over the forward estimates.