Britain to tighten up banking supervision

By Huw Jones

LONDON (Reuters) - Britain will tighten up how it supervises banks, scrutinizes 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," finance minister 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 nationalize Northern Rock and Bradford & Bingley banks.

Britain also owns 70 percent of Royal Bank of Scotland (RBS.L) and holds 43.4 percent stake in Lloyds Banking Group LLOYD.L 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 destabilizes 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 formalize the existing "tripartite" setup under which the finance ministry, 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 UK opposition 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.