By Huw Jones
LONDON, Nov 16 (Reuters) - UK regulators must not give in to"special pleading" from the biggest banks and should go aheadand split them up if a reform aimed at protecting theirdeposit-taking retail arms from their riskier businesses iscircumvented, a senior UK lawmaker said on Monday.
Andrew Tyrie, chairman of parliament's treasury committee,said banks must get on with implementing the Vickers reformwhich requires banks HSBC Barclays, Lloyds and RBS to ring-fence the capital of their retail banks by 2019.
The aim is to make sure taxpayers won't be needed again torescue banks in trouble, and regulators have the power to"electrify" the fence, meaning the lender has to fully separateout its retail arm.
"If they conclude that a bank is 'gaming' the ring-fence,parliament will expect them to say so and threaten or use itspowers to separate banks," Tyrie said in a speech at Allen &Overy lawfirm.
Regulators must decide by 2021 if the ring-fencing reform isworking as intended.
"That review could recommend full separation of all banks.Banks need to be reminded that a review is coming," Tyrie said.
His blunt message contrasts with the more emollient approachtaken towards the banks by the government in recent months.
British finance minister George Osborne, who ousted MartinWheatley, the hardline chief executive of the Financial ConductAuthority regulator, wants a "new settlement" with banks and forregulators to ensure that London is the most attractive home forinternational lenders.
"Regulators should not give in to special pleading frombanks in implementing the reforms introduced as a result of thefinancial crisis," Tyrie said.
Memories of the 2007-09 crisis will be rekindled on Thursdaywhen the Bank of England publishes a report on the collapse ofHBOS, now part of Lloyds.
Before then, Tyrie's committee will quiz Britain's topbanking regulator, Andrew Bailey of the Bank of England'sPrudential Regulation Authority, on Tuesday at 1000 GMT.
It was worrying that regulators still don't believe that bigbanks that fail can be wound up or "resolved" without taxpayermoney being needed, Tyrie said.
Implementing ring-fencing would be key to making banksresolvable and keeping taxpayers off the hook, he added.
Some of the banks' criticism of ring-fencing contained"misrepresentations" and the "awkward truth" is that the measurewas forcing the boards of banks to "identify in more detail whatis really going on in them", Tyrie said. (Editing by Greg Mahlich)