UPDATE 3-UK names Bailey to head central bank prudential watchdog

By Huw Jones

LONDON, Feb 19 (Reuters) - Britain named veteran Bank ofEngland official Andrew Bailey on Tuesday to head its newbanking regulator just a month before he must present a plan tohelp two partly state-owned banks to become independent.

Bailey will become a deputy governor of the Bank of Englandand chief executive of the bank's new prudential regulationauthority (PRA) from April 1.

He is already head of prudential supervision at the UK'sFinancial Services Authority and was expected to be confirmed inthe new job. The FSA will be scrapped at the end of March whenthe PRA becomes Britain's main banking and insurance supervisor.

The revamp is part of the country's attempts to draw a lineunder supervisory failures in the run-up to the 2007-09financial crisis that forced Britain to take a controlling stakein Royal Bank of Scotland and a large minority stake inLloyds.

"Andrew Bailey has the right skills and experience to leadthe Prudential Regulation Authority as it moves into the new eraof judgment-led supervision," UK finance minister George Osbornesaid in a statement.

The Bank of England, which will be led by Mark Carney fromJuly, becomes one of the most powerful central banks when ittakes on its new prudential supervisory role. It is also home tothe new Financial Policy Committee, on which Bailey sits, to setthe direction for supervision.

Bailey's immediate challenge is to present a plan in Marchto the FPC outlining how much extra capital and restructuringRBS and Lloyds may need so they can each stand on their own twofeet. Prime Minister David Cameron said on Tuesday he wantedchanges at RBS to be accelerated.

It will be a tricky balancing act for Bailey as thegovernment will want to make sure the banks can plug any capitalgaps themselves and not depend on taxpayers again.

Bailey is looking at whether all the UK banks are properlycapitalised though the focus is largely on RBS and Lloyds.

In an interview with the Times on Tuesday, Bailey said therewere still some problems with banks' balance sheets.

"Some assets are valued in a way I don't think issufficiently prudent. That is not lying. That's a matter ofjudgment," Bailey told the Times.

He also said there was a small "tail risk," that fines forLibor, mis-sold interest rate hedging products and otherwrongdoing could cause institutions to "keel over."

"His leadership will be instrumental in shaping amuch-needed cultural change at the regulator, moving away fromthe failed box-ticking exercises of the FSA toward morejudgment-led regulation," said Andrew Tyrie, chairman ofparliament's treasury select committee.

"The size of the task facing Mr Bailey should not beunderestimated," added Tyrie's committee will hold anappointment hearing next month, though with no power of veto.

The British Bankers' Association welcomed news that Baileywould also be a member of the FPC and the new standaloneFinancial Conduct Authority to ensure supervisory coordination.

Last week, Bailey said the financial crisis has moved onfrom its early, prudential phase when the focus was on toppingup capital at banks.

Supervisors are now having to deal with the second phase -the misconduct coming to light such as the Libor and loaninsurance mis-selling scandals - at a time when regulators arestill "building architecture" in response to prudential issues.

Bailey, whose signature appeared on bank notes when he wasthe Bank of England's chief cashier, will be deputy governor forprudential regulation.

Hector Sants, then chief executive of the FSA, was due tofill the role and head up the new PRA, but last year resigned tobecome head of compliance at Barclays.