By Huw Jones
LONDON, Feb 7 (Reuters) - Britain's plan to safeguard retailbanking is a far better idea than the U.S. approach of forcingbanks to hive off speculative trading, the Bank of England'snext governor told lawmakers.
Mark Carney is to take up the reins in July, three monthsafter the central bank becomes Britain's main regulator forlenders.
In the wake of the financial crisis, regulators areintroducing measures to shield the deposit-taking business ofbig banks from high-risk practices, reducing the prospect of abig failure that could destabilise markets and force agovernment bailout.
The United States is implementing a reform known as theVolcker Rule to ban proprietary trading, in which banks takespeculative bets on the market with depositors' money.
Britain's government this week said it would implement theso-called Vickers reform, which requires separate, extra capitalfor the deposit-taking arms of banks, by 2019.
"No, I don't think you should overlay a Volcker Rule on theVickers recommendations. The ring-fence model is the superiormodel," Carney told a UK parliament treasury select committeehearing into his appointment.
"It's extremely difficult to draw the line betweenmarket-making and proprietary trading ... It would unnecessarilydivert the supervisors' attention from ensuring the ring fenceis respected," Carney added.
The government has also agreed that regulators can break upbanks if the so-called ring-fence proves leaky, a move Carneysaid he would support on an "institution by institution basis".
SHOCKING
The Bank of England and its Financial Policy Committee willhave powers to force banks to top up their capital buffers aboveminimum requirements.
The current governor, Mervyn King, has been among the hawkscalling for much tougher supervision of banks after Britain hadto rescue RBS and Lloyds, two of the country's"big four" lenders.
In his hearing, Carney, a former Goldman Sachs banker,signalled he would largely continue with the hawkish tone set byKing after two banks, RBS and Barclays, have been fined forrigging the Libor interest rate benchmark.
Even though the new Financial Conduct Authority will look totackle market abuse, Carney said what he described as "shockingscandals" would also affect how the central bank superviseslenders.
"This type of behaviour, even at a much less serious level,has consequences for prudential supervision, for capital, foractivities, for compensation," Carney said.
Some UK lawmakers want Britain to impose a much stricter capon bank balance sheet size, known as a leverage ratio, than thatagreed at the global level.
The ratio would measure a bank's total assets, not justrisk-weighted assets, against its equity, and any breach above acertain level would draw the regulator's focus.
The cap would become the main regulatory brake on risk.
Andrew Haldane, the Bank of England's director of financialstability, said the system of working out capital requirementsis too complex, relying on a bank's own questionable arithmetic,and that simpler rules such as a leverage ratio would be safer.
Carney took a more moderate stance, saying the ratio shouldbe a backstop to calculating capital buffers, reiterating thepolicy of the G20's Financial Stability Board, which he chairs.
But there is a need to keep a close eye on what are deemedto be low-risk assets at banks to make sure enough capital isbeing held against them, he said.
The BoE should not be directing bank activities towardsspecified sectors or regions, given that the government haspolicy levers for that, he added.
Britain, with the United States, is leading the way indevising mechanisms to close big banks that get into troublewithout taxpayer help, but there is more work to be done, Carneysaid.