UK government strengthens bank rescue measures

LONDON (Reuters) - Britain is to strengthen the regulation of its banking system by giving the Bank of England (BoE) 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 program 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 Britain's economy, which appears to be heading for a deep and prolonged recession.

British 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.

Britain's banks were offered a 37 billion pound ($55 billion) 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.

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

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

The Queen's Speech contained few surprises.

The Banking Bill, which will now give the BoE additional powers, was originally created to deal with the crisis triggered by failed bank Northern Rock, which was taken into public ownership earlier this year.

But since the deepening of the global financial crisis, it has been amended to allow the central bank and other regulators to step in quickly when banks get into financial trouble.

The government said Wednesday the BoE would get a "statutory financial stability objective" alongside its other legal objective to run monetary policy. "The Banking Bill will strengthen the framework for protecting bank depositors, enhance financial stability through measures to reduce the likelihood of banks getting into difficulties, and improve the tools available to resolve the situation if they do," the Treasury said in a statement.

The legislation establishes a regime which gives the BoE power to provide covert short-term liquidity to banks. Bank disclosure rules will be changed allowing the Financial Services Authority to collect information from banks in trouble and share it with the BoE or government, the Treasury said.

As previously announced, the bill increases the guarantee for bank savings to 50,000 pounds from 35,000 pounds per person, per bank -- responding to concerns about consumer protection after news of the troubles at Northern Rock last year sparked the first major run on a British bank in more than a century.

(Reporting by Frank Prenesti; Editing by Kate Kelland, Jodie Ginsberg, John Stonestreet)