UK consolidates Bank of England's bank supervision role

By Huw Jones

LONDON, July 21 (Reuters) - Britain's government unveiledplans on Tuesday to centralise financial regulation further atthe Bank of England and reinforce its own powers to shieldtaxpayers from having to prop up failing lenders in future.

British finance minister George Osborne published aconsultation paper to reform the regulatory system just twoyears after a shake-up aimed at plugging gaps highlighted by a"light touch" regulatory regime that failed to spot the 2007-09financial crisis coming.

The government proposed making the Prudential RegulationAuthority (PRA) an integral part of the Bank, ending its statusas a subsidiary with its own board.

The PRA makes sure that banks like HSBC, Lloyds, Barclays and Royal Bank of Scotland hold enough capital and do not take on too much risk.

A new Prudential Regulation Commmittee (PRC) would sitalongside the central bank's Monetary Policy Committee, whichsets interest rates, and Financial Policy Committee (FPC), whichsets the direction for regulation.

"Ensuring the Bank is well positioned to fulfil its vitalrole of overseeing monetary policy and financial stability is akey part of the government's long term economic plan," Osbornesaid in his announcement.

The government said the new PRC would retain the PRA'sfreedom to make rules, policies and supervisory decisions.

"The PRA name and brand will remain unchanged," thegovernment said in its consultation paper.

The government also said it was looking for the power tore-define the role of the BoE's deputy governors and other topofficials without getting detailed parliamentary approval.

Financial lawyers said the changes formalise the BoE'scentral role in regulation, potentially partly sidelining thestandalone Financial Conduct Authority, which was set upalongside the PRA in 2013.

"It really tends to emphasise the extent to which the Bankis essentially in control now of the regulatory agenda for banksand insurers," said Michael McKee, a lawyer at DLA Piper.

"All of this is more consistent with a more joined-upapproach between the Bank and the government. The financialcrisis has emphasised more strongly the role of central banks,typically at the expense of the other regulators like the FCA,"McKee said.

Etay Katz, a lawyer at Allen & Overy, said the changes wouldincrease the influence other parts of the BoE have overprudential regulation.

Osborne's consultation also sets out in more detail how theTreasury and BoE cooperate to avoid the need to use public moneywhen a bank gets into trouble.

The BoE will have to give the Treasury enough information ina timely way for it to assess whether there a risk exists thattaxpayers might be called upon.

The Treasury would have the power to "request specificregulatory information", and require the BoE to provide draftstwo weeks in advance of any announcement of changes to rules onhow banks are wound up in a crisis. (Editing by Catherine Evans)