Tighter bank regulation plans unveiled

Chancellor Alistair Darling leaves 11 Downing Street in London June 29, 2009.

LONDON (Reuters) - The government will tighten up how it supervises banks, scrutinises bonuses paid to their employees and punish misconduct harder as it tries to prevent a re-run of the credit crunch, the government said on Wednesday.

"Financial institutions in many countries took on too much risk," Chancellor Alistair Darling told parliament. "It is also clear that some financial institutions had little appreciation of what was going on inside their businesses."

The worst financial crisis since the Great Depression of the 1930s forced Britain to tap billions of pounds of taxpayers' money to nationalise Northern Rock and Bradford & Bingley banks.

The government also owns 70 percent of Royal Bank of Scotland and holds 43.4 percent stake in Lloyds Banking Group after having to bail them out, a situation Darling said he aims to reverse but without giving a timeframe.

The measures announced on Wednesday aim to stop a bank getting into so much trouble that it destabilises the broader financial system.

But Darling stopped short of introducing steps to break up big banks and instead require extra capital according to the level of risk, a step welcomed by the CBI business lobby.

He largely mirrors initiatives already under way at European Union and global levels to improve supervision of system-wide risks, and force banks to hold more capital so that they should not need government bailouts in future.

A core measure is to formalise the existing "tripartite" setup under which the Treasury, Financial Services Authority and Bank of England jointly supervise the financial markets.

It was widely seen as failing to spot problems at Northern Rock and other banks early enough, but Darling rejected scrapping it. The three bodies will instead work more closely in a new Council for Financial Stability, he said.

"This will not just deal with immediate issues but also monitor system-wide financial stability and respond to long term risks as they emerge," Darling said.

CONSERVATIVES WILL AXE TRIPARTITE SYSTEM

The timing of any changes is crucial, banks say.

Bumping up capital requirements too soon could risk leaving banks with less money to lend and aid economic recovery.

It could also put the industry at a competitive disadvantage if other countries don't follow suit at the same time, said Angela Knight, chief executive of the British Bankers' Association.

The Conservative Party, tipped to win a general election due by June 2010, said Darling's plans were inadequate and it wants a stronger role for the central bank.

"The next Conservative government will abolish the tripartite system and put the Bank of England in charge of prudential supervision," the Conservative shadow chancellor George Osborne told parliament.

Paul Myners, a junior Treasury minister, said the new Council will meet four times a year but have no executive power.

The Association of British Insurers said Darling was right on balance not to dismantle the tripartite system of supervision as this would delay much-needed changes.

Government officials said many of the measures would be adopted by spring of 2010 but some thought this overambitious.

"It is unlikely that significant legislation will be brought in before next year's general election and Conservatives, if they come into power, are likely to tear up the paper," said Jacqui Hatfield, a partner at Reed Smith law firm.

Other measures proposed by Darling included:

-- higher capital and liquidity buffers for banks;

-- a new national money guidance service funded by a levy on financial institutions;

-- legislation to pre-fund and expand the role of the financial services compensation scheme to safeguard bank deposits;

-- the FSA will report annually on how it deals with banks that don't comply with a code of practice on remuneration but with no "naming and shaming" of banks or individuals;

-- a new backstop power for the FSA to stop banks lending too much.

(Additional reporting by Sumeet Desai and Adrian Croft, editing by David Stamp)