By Huw Jones
LONDON, Jan 19 (Reuters) - Badly run banks in Britain willbe forced to hold substantially more capital until they can showthat internal risks are under control, the Bank of England saidon Monday.
The BoE's Prudential Regulation Authority (PRA) published aconsultation paper on how it will use powers to require lendersto hold extra capital to cover risks that are not generallycovered by a bank's minimum core buffer.
Regulators have said that poor governance and risk controlshave allowed misconduct, like the attempted rigging of interestrate and currency benchmarks, to flourish, resulting in a stringof hefty fines which in turn is prompting supervisors toconsider extra capital requirements.
"The PRA therefore proposes that firms with significantlyweak risk management and governance should hold additionalcapital in the form of a buffer to cover the risks posed bythose weaknesses until they are addressed," the PRA said in itsconsultation paper.
Banks with poor internal controls or governance would haveto hold extra capital equivalent to 10 to 40 percent of its corebuffer and some of the additional capital it is already holding.
"The PRA may decide on a larger scalar within that rangeshould the PRA buffer assessment reveal greater vulnerabilitiesto stress," the paper said.
A bank would be required to produce a plan to address thefailings in risk controls and governance. Once the failings havebeen addressed, the extra capital requirement would be removed.
The changes reflect tougher European Union bank capitalrequirements being phased in.
Bankers said that the likelihood of lenders being saddledwith such hefty extra capital buffers will be lessened as theBoE introduces a separate set of new rules requiring seniorbankers to be directly accountable to each major bit of thebusiness.
Under this new "senior managers' regime", a named individualwill be directly responsible for governance and risk management,a step regulators believe will make failings less likely.
The new buffers would be phased in from January 2016 withfull compliance by January 2019. (Editing by Mark Heinrich)