No need to ban UK banks from proprietary trading -lawmakers

LONDON, March 15 (Reuters) - A U.S.-style ban on Britain'sbanks trading with their own money is not needed and would betoo difficult to enforce, a group of influential lawmakers saidon Friday.

Instead, Britain should use the threat of capital add-ons orother tools to bear down on any bank that shows signs of proprietary trading, said the Parliamentary Commission onBanking Standards (PCBS).

The PCBS said a U.S. ban on proprietary trading, known asthe Volcker rule, has shown it is difficult to define andprohibit such trading, and it would impose an extra burden on UKregulators who already have to enforce a complex separation ofbanks' retail operations.

"The Banking Commission does not feel it appropriate torecommend the immediate prohibition of proprietary trading,"said Andrew Tyrie, chairman of the PCBS.

But he did not rule out a ban in the future.

"Were this approach to prove ineffective, further measures,including prohibition, could be desirable," he said in reportreleased by the PCBS.

There has been limited support for a "Volcker rule" inBritain, which is pushing through plans to shield retail bankingarms from riskier investment banking activity, called Vickersreform, as a way to safeguard taxpayers and depositors from anyfuture banking troubles.

Incoming Bank of England Governor Mark Carney last monthsaid there was no need to add a Volcker rule, citing thedifficulty in drawing a line between market-making andproprietary trading.

The PCBS is finalising its report on banking standards, andits proposals could be added to a banking reform bill currentlybeing discussed in Parliament.

UK banks told the PCBS they do not engage in proprietarytrading and said they do not want to, but Tyrie said that couldchange: "At a time when banks are under less intense scrutiny,proprietary trading could re-emerge as a greater risk."

He said proprietary trading was not a suitable activity fora bank, and could lead to conflicts of interest, have harmfulcultural effects and raise pay expectations.

The Prudential Regulation Authority, which takes over UKfinancial regulation in April, should pay close attention to bigtrading units and volatile revenue flows, and if it spotspotential proprietary trading it should use capital add-ons orother methods to incentivise the firm to exercise tightercontrol, Tyrie said.