LONDON Global regulators urged the Bank of England (BoE) to find ways to circumvent the secrecy of its rating system on the financial health of banks and tip off lenders it thinks are getting into difficulties.
One of Britain's new financial supervisors, the Prudential Regulation Authority (PRA) at the Bank, is drawing up confidential rankings of all banks and insurers using a so-called "proactive intervention framework" or PIF rating.
A rating of 1 means there is a low risk to the viability of an organisation while 5 means it is bust.
Most firms are expected to score 1 or 2 but the PRA will not publish its findings as even a slight change could trigger a big market reaction.
The watchdog will not even reveal the rating to the firm in case it feels obliged under EU rules to tell the market.
But the Financial Stability Board, which coordinates global regulation for the Group of 20 leading economies (G20), said the system needed to be fine-tuned because awareness of its PIF number could help prompt a bank to take remedial action.
"The PRA should ensure that supervised firms are aware of any heightened concerns and accompanying intervention activities, and should explore options to disclose the PIF rating to such firms without triggering public disclosure," according to the FSB, whose chairman is the Bank Governor Mark Carney.
The FSB examined a slew of regulatory reform in the UK following the 2007-2009 global financial crisis and how Britain has implemented G20 pledges to make finance safer.
The review, which had no Bank official on its panel and was led by Bank of Brazil Deputy Governor Luiz Pereira da Silva, said Britain should be commended for its reforms but warned about the risks of too much centralisation of new rules.
Britain was among the hardest hit by the crash because of the size and reach of its banking sector, parts of which had to be bailed out by taxpayers.
It scrapped the decade-old Financial Services Authority, blamed for failing to spot the crisis, and replaced it in April with three new bodies which have been among the most hardline regulators in the world.
In addition to the PRA, Britain also established a Financial Policy Committee (FPC) at the Bank to spot broad risks, and a standalone Financial Conduct Authority (FCA) to protect consumers.
The FSB said centralising so much regulation at the Bank risked creating a "group think" mentality and that supervision could end up with a lower "status" than the high level policy work at the FPC.
"It will be important to ensure that the close and equal partnership between the PRA and the rest of the Bank endures... It will also be important... to maintain the 'will to act'," the review added.
It also said it was critical for regulators to retain senior staff, many of whom have moved to lucrative posts at banks and consultancies, to make sure reforms were implemented in full.
Regulators should also ensure they had enough risk specialists to cover the insurance sector and be flexible enough to respond to problems at smaller financial firms, the review said.
(Editing by David Cowell)