CORRECTED-Britain urged to split banks if new rules fail

(Corrects to clarify basis on which banks could be split inheadline and paragraphs 1, 2, 8, 12 and 14)

* Regulator should decide leverage ratio - lawmakers

* Banking reform bill needs to be improved - MP Tyrie

* Bill due to be debated in parliament on Monday

By Matt Scuffham

LONDON, March 11 (Reuters) - Britain should adoptlegislation that could force all banks to split routine retailoperations from riskier investment activities if new rulesdesigned to protect taxpayers fail, an influential panel oflawmakers said.

Any decision would have to be recommended by an independentreview and the final decision to act on an industry-wide basiswould lie with the government and parliament, not with theregulator.

The Parliamentary Commission on Banking Standards, which hasbeen asked to find ways to reform banks, also said on Mondaythat Britain's financial regulator should be given theresponsibility to decide how far banks can leverage theircapital for investment and lending.

The government's Banking Reform Bill is due to be debated inparliament on Monday. But Conservative MP Andrew Tyrie, whoheads the commission, said that current proposals to change theindustry fall short of what is required.

"There remains much more work to be done to improve thebill," he said in a report published ahead of the debate.

Britain is determined to prevent a repeat of the need fortaxpayer-funded bank bailouts after the 65 billion pound ($97billion) double rescue of Royal Bank of Scotland andLloyds Banking Group in 2008.

The commission was set up amid public outcry after Barclays was fined for rigging global interest rates, the latestin a string of banking scandals including the mis-selling ofloan insurance and complex interest rate hedging products tosmall firms.

Finance Minister George Osborne said in February he wouldtake up a recommendation made by the commission that anyindividual bank that tried to find a way around the new lawscould be broken up by the regulator.

'INVESTOR UNCERTAINTY'

All the leading British banks, including Barclays, HSBC and RBS, will be affected by the legislation.

The industry, however, has warned that the severity of theproposed reforms - more rigorous than those in France andGermany - could put British banks at a disadvantage againstcontinental rivals such as Deutsche Bank and BNPParibas.

"This will create uncertainty for investors, making it moredifficult for banks to raise capital, which will ultimately meanthat banks will have less money to lend to businesses," theBritish Bankers' Association (BBA) said last month.

The BBA's plea appears to have held little sway with thecommission and Tyrie said that a "second reserve power for full,industry-wide separation" needed to be included.

"The bill would be strengthened by making specific provisionto consider the case for full, industry-wide separation if thering-fence is judged to be failing. As is appropriate, the finaldecision would lie with the government and parliament and notwith the regulator," the commission said in its report.

It is recommending a periodic review of whether banks aresticking to the rules.

Among the proposals to rein in risk-taking is the leveragecap. The commission wants this set at 25 times banks' capital.The government wants a weaker cap of 33 times capital, which thecommission's report said is "unlikely to provide a robust enoughbackstop".

The commission called on the government to delay pushingthrough the Banking Reform Bill until its final report ispublished in May.

"The task of sorting out the banking industry, of which thisbill will form a major part, is absolutely essential for thelong-term health of the British economy. Let's get it right,"the commission said. ($1 = 0.6699 British pounds) (Editing by David Goodman)