UK told to add break-up threat to bank reform plan

* Ring-fence plan falls "well short" of what is needed * UK should add legislation to carry threat of bankseparation * Simple derivatives should be allowed within "ring-fence" By Steve Slater LONDON, Dec 21 (Reuters) - Britain needs to introducelegislation that could break up banks if standards slippedbecause current reform proposals fall short of what is needed,an influential panel of lawmakers said. The Parliamentary Commission on Banking Standards also saidthe government could set tougher rules for how much leveragebanks were allowed, adding the committee itself would considernext year whether to propose banning proprietary trading. The PCBS said on Friday banks should be allowed to sellsimple derivatives within their ring-fenced operation, which hadbeen a point of contention. Britain, going further than most countries in pushingthrough change, is forcing banks to separate, or "ring-fence",their domestic retail arms from riskier investment banking. "The proposals, as they stand, fall well short of what isrequired. Over time, the ring-fence will be tested andchallenged by the banks," PCBS chairman Andrew Tyrie said. "That is why we recommend electrification. The legislationneeds to set out a reserve power for separation; the regulatorneeds to know he can use it." Britain wants to prevent a repeat of the need for taxpayersto bail out lenders, as happened in 2008 with a 65 billion pound($106 billion) double rescue of Lloyds Banking Group and Royal Bank of Scotland. The PCBS, asked to assess government plans before theirintroduction next year, said banks had to be discouraged fromgaming the new rules for the ring-fence to succeed. "All history tells us they will do this unless incentivisednot to," Tyrie said, adding politicians could be lobbied to putholes in the ring-fence. "Additional powers are essential to provide adequateincentives for the banks to comply not just with the rules ofthe ring-fence, but also with their spirit," the Commission saidin its 146-page report. A Treasury spokesman said it would study the report andrespond when reforms were brought to Parliament early next year. "MORE NEEDS TO BE DONE" The PCBS was set up after Barclays was fined forrigging global interest rates and banks were slammed for aseries of mis-selling scandal. Tyrie said the market rigging and corruption shown this weekat Swiss bank UBS "beggar belief. It is the clearestillustration yet that a great deal more needs to be done torestore standards in banking." Among plans to rein in risk-taking is a cap on leverage,which Britain plans to set at 33 times banks' capital - weakerthan an original proposal for a maximum of 25 times. The PCBS said it was "not persuaded by the government'srelaxation" of that leverage rule, adding the future regulator,the Financial Policy Committee, should set the leverage cap. Tyrie said it may also be appropriate for Britain to blockbanks from any proprietary trading - known as the Volcker Rulein the United States - and the PCBS will take evidence on thatearly next year. The cross-party commission, which includes Justin Welby, thenext Archbishop of Canterbury - the Church of England's mostsenior bishop, has spent the past three months deliberating thereform plans, taking evidence from the bosses of major banks aswell as regulators, politicians and central bankers. It said it was concerned too many reforms will be left tothe discretion of the future regulator, and said the power toforce bondholders to take losses when a bank hits trouble shouldbe included in primary legislation.