UPDATE 1-Canada to set higher capital requirements for key banks
* Budget announcement does not name the banks
* Would affect "domestic systemically important banks"
* Will move on federal law if common regulator idea dies
* Will promote entry of new, smaller banks
OTTAWA, March 21 (Reuters) - Canada's federal budget laid out plans on Thursday to impose higher capital requirements on banks whose failure could disrupt the Canadian financial system and economy.
Finance Minister Jim Flaherty also said the federal government would go ahead with its own capital markets regulatory framework if it cannot agree with the provinces on creating a common securities regulator.
And he said the government would review how it regulates financial institutions to ensure it promotes the entry and growth of smaller financial institutions in order to foster competition that helps consumers and businesses.
The new rules for "domestic systemically important banks" will parallel measures agreed by the Financial Stability Board, the financial watchdog of the Group of 20 leading economies, in response to the 2008 crisis.
Canada's superintendent of financial institutions will determine the higher capital requirement. The document did not name any particular bank.
The government will also implement a "bail-in" regime for these banks to ensure that, if a bank depletes its capital, it can be recapitalized through the very rapid conversion of certain liabilities into regulatory capital.
"This risk management framework will limit the unfair advantage that could be gained by Canada's systemically important banks through the mistaken belief by investors and other market participants that these institutions are 'too big to fail'," the budget document said.
Canada's biggest banks are Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal and Canadian Imperial Bank of Commerce .
On the question of trying to come up with a common securities regulator to replace the patchwork of provincial regulators, Flaherty said he was coming to the end of his patience.
"The government's preferred approach is to improve the regulation of Canada's capital markets through a cooperatively established common securities regulator," the budget said.
"If a timely agreement cannot be reached, the government will propose legislation to ensure that it can carry out its regulatory responsibilities for capital markets consistent with the decision of the Supreme Court of Canada."
This referred to a December 2011 ruling that Flaherty's initial plans for a national securities regulator stepped too far into areas of provincial jurisdiction. He has been trying to come up with a replacement agreeable to the provinces ever since.
The budget also announced plans to help Canadian financial institutions expand internationally, partnering with them in promoting the Canadian brand. And it said it would allow financial institutions more flexibility regarding the residency of members of board committees.