Bank rescue plans bolstered

LONDON (Reuters) - The government is to strengthen the regulation of its banking system by giving the Bank of England powers to step in as soon as a bank begins to show signs of financial trouble.

But the annual Queen's Speech -- which sets out the government's legislative programme for the coming year -- made no mention of any plans to compel banks to lend more.

Encouraging banks to increase lending was identified by Bank of England Governor Mervyn King last week as the single most important challenge facing the economy, which appears to be heading for a deep and prolonged recession.

Media had speculated a new statutory code would be introduced that would require lenders to give set notice on changes to credit and impose fines for banks that treat customers unfairly.

Banks were offered a 37 billion pound bailout by the government in October in return for public equity stakes in the institutions that chose to use the fund.

But criticism has been growing that the banks have used the cash to shore up capital reserves instead of lending it on to small businesses struggling with a looming recession.

Some banks have already announced changes to their practices.

Merger partners Lloyds and HBOS said on Wednesday they would pass on interest rate cuts or increase lending to small businesses, while Royal Bank of Scotland pledged on Monday to delay home repossessions.

All three groups are major beneficiaries of the government's recapitalisation plans.