Bank of England flexes muscles to improve banking standards

By Huw Jones

LONDON, June 19 (Reuters) - The Bank of England (BoE) isdetermined to improve business standards at banks, and hasalready forced an unidentified firm to limit its lending anddeposit-taking until it met regulatory requirements, it said onThursday.

Policymakers and regulators see changing the businessculture at banks as essential to lasting reform in an industrythat had to be bailed out by taxpayers during the 2007-09financial crisis.

The BoE's supervisory arm, the Prudential RegulationAuthority (PRA), on Thursday set out how it already has - andwill in future - use its powers to enforce change in an industrytarnished by scandals over mis-sold products and the rigging ofbenchmark interest rates.

In a policy statement, the PRA said it was looking out forfirms that failed to conduct their business in a safe and soundway, poorly functioning boards that did not challengeexecutives, and inadequate control of risks.

The first step would be to step up the intensity ofsupervision, increase reporting requirements and set a deadlinefor improvements, it said.

"The PRA may proceed to an enforcement investigation withouthaving exhausted all other supervisory options," it added.

In June 2013, Britain's parliament published a report onbanking standards that made several recommendations, including anew professional body and more women on trading floors.

It also called for a "special measures" tool for regulators,but the BoE said at the time that no new tools were needed andthe PRA statement set out how existing tools could be used.

The PRA said it expected banks to cooperate in resolvingcultural issues but wouldn't hesitate to use formal powers if itfelt a lender wouldn't respond appropriately.

The watchdog could appoint an outside person to reviewoperations at the lender's cost, or if a bank's board or topstaff lacked the necessary skills, deposit-taking could bebarred for six months, it added.

The PRA gave examples of where it had already used itspowers to improve standards, such as ordering a firm to put inplace committees to tackle regulatory concerns or requirements.

It has also appointed an outside person, reporting directlyto the PRA, to oversee compliance with its requirements.

A firm also agreed to limit its balance sheet growth -essentially lending and/or deposit-taking - to a set percentagea year until the watchdog was satisfied that more robustgovernance structures were in place.

The PRA did not identify any of the firms in its examples.

Martin Wheatley, chief executive of the Financial ConductAuthority, launched last year to crack down on bad behaviour atbanks, has said top bank executives were getting the message butthat it had yet to fully trickle down to lower levels.

The most dramatic attempt to change a bank's culture came inJuly 2012 when the BoE pushed out Barclays' chiefexecutive Bob Diamond a month after the lender was fined forrigging the Libor benchmark interest rate. (Editing by Mark Potter)