UK Government to Tighten Banking Supervision

Britain will tighten up how it supervises banks, scrutinise 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 nationalise Northern Rock and Bradford & Bingley banks.

Britain also owns 70 percent of Royal Bank of Scotland and holds 43.4 percent stake in Lloyds Banking Group .

The measures announced by Darling on Wednesday aim to stop a bank getting into so much trouble that it destabilises the broader financial system.

They largely apply initiatives already underway at European Union and global levels to improve supervision of system-wide risks.

Sharon Lorimer

They aim to force banks to hold more capital so that they should not need government bailouts in future.

A core measure is to formalise 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.

Timing Is Key

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.

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.

More From CNBC.com

• EU to Unveil New Banking Reforms in October: Report
• President Obama Urges New US-Russia Partnership
• Europe Bank Stress Tests of 'Limited Value': Analyst

"The next Conservative government will abolish the tripartite system and put the Bank of England in charge of prudential supervision," the Conservative shadow finance minister George Osborne told parliament.

Other measures proposed by Darling included:
— higher capital and liquidity buffers for banks;
— a new national money guidance service funded by a levy on financial institutions;
— legislation to pre-fund and expand the role of the financial services compensation scheme to safeguard bank deposits;
— the FSA will report annually on how it deals with banks that don't comply with a code of practice on remuneration;
— a new backstop power for the FSA to stop banks lending too much.

Parts of policy proposals are aimed at launching a debate, but immediate action could be taken under existing laws.

Copyright 2009 Reuters. Click for restrictions.