By Huw Jones
LONDON, Dec 11 (Reuters) - Banking scandals such as the rigging of Libor interest rates showed banks were too unwieldy and should be given incentives to downsize, a Bank of England (BoE) policymaker said on Tuesday.
Michael Cohrs, a member of the BoE's Financial Policy Committee (FPC) which sets direction for regulation in Britain, saw no compelling reason why banks should be so big and global.
Reams of new regulation had not solved the problem of "too big to fail" banks, which effectively enjoy a funding subsidy because supervisors cannot let them collapse because of their sheer scale, the former Deutsche Bank and Goldman Sachs banker said.
"We have had clear evidence that even the best-run banks have had embarrassing incidents in the last six months which show they are too big to be managed," Cohrs told a parliamentary commission looking into banking standards.
The Serious Fraud Office arrested three people in the first arrests stemming from a global probe into the manipulation of the London interbank offered rate or Libor.
Barclays was fined 290 million pounds ($467 million) in June for rigging Libor and other banks are set to face similar penalties.
The Bank of England becomes Britain's main banking regulator from next April.
Britain's retail banking sector is dominated by four big names, HSBC, Barclays, RBS and Lloyds, and policymakers are keen to see new entrants.
Cohrs urged an end to "London-centric" banks, adding "you have almost got to legislate for competition".
He had discussed with Treasury officials the possibility of market share caps to spur more competition and make banks focus on customers, rather than return on equity, the market's main indicator of a bank's financial health.
"Maybe we should think about a tax on size, give banks an economic incentive not to be so big. I believe banks have to be more regional," Cohrs said.
A "concentration" rule, based on the size of deposits, could be useful, but he acknowledged no-one on the FPC agreed with him on this.
The planned ring-fencing of retail arms of banks, designed to shelter customer deposits from risky investment banking activities, was a step in the right direction, though a total separation was very hard to do, Cohrs said.
He doubted the recent spate of regulations will change culture at banks but supervisors could create mandatory incentives.
"We need bankers who understand right from wrong and who are not fixated on what this year's bonus pot will be," Cohrs said.
Changes have been made to how bonuses are paid, such as deferring them over several years and part-paying in shares rather than making them all in cash.
The FPC would like to go further and see bankers paid in their employer's bonds, with deferral over seven to 10 years, he said.
He dismissed as "rubbish" threats by banks they will move to another country to avoid heavier UK rules, saying London still benefited from its time zone and language.