FSA's Turner warms to "tax on size"

By Huw Jones

LONDON (Reuters) - Big banks that take risks may have to hold more capital than their smaller, conservative peers but no legal carve up of the industry is foreseen, the top market regulator said on Tuesday.

Adair Turner, chairman of the Financial Services Authority, told the parliamentary treasury committee that financial capitalism's biggest crisis will end up with banks holding more and higher quality capital that will dent returns.

He dismissed suggestions from Bank of England Governor Mervyn King last week that if a bank was too big to fail, it was simply too big.

Britain has been forced to intervene with billions of pounds of taxpayer cash to rescue or shore up a string of banks such as Northern Rock and Bradford and Bingley.

But there were doubts if it would be possible to shrink banks enough so they don't destabilise the market when they collapsed, Turner said.

"I am therefore significantly attracted to ideas in (U.S. Treasury Secretary Timothy) Geithner's proposals that we should think about not an absolute limit on size, that would be very difficult to achieve, but a sliding scale of capital requirements which simply require higher capital requirements from large banks or from banks involved to a greater extent in risky trading," Turner said.

"It's a tax on size," Turner told the treasury committee.

There could be limits on activities within a bank.