Watchdog agrees to cost new bank rules

"One key concern is assessing the trade-off between the tougher regulatory regime and the cost to the banking system. No one has yet decided who will make the judgement call or how. With reform developing at G20, EU and domestic levels, there is no obvious answer," Morris said.

Britain's banks said the cost of plans to strengthen supervision and impose living wills needed analysing -- echoing a call from the French Banking Federation this week for an impact assessment on the effect of higher capital rules.

"Before proceeding, there needs to be clarity over what is meant by the policy, a clear understanding of the objectives and both the narrow and wider impact," the British Bankers' Association said in a statement.

Britain wants to avoid a re-run of the nationalisations and bail-outs that saw it bring Northern Rock and Bradford & Bingley under public ownership and take large stakes in Royal Bank of Scotland and Lloyds at huge cost to taxpayers.

The G20 summit in the United States last week set an end of 2010 deadline for all systemically important firms to develop "internationally consistent" contingency and resolution plans.

But there is still a debate among global regulators whether such firms should also be made to pay a capital "surcharge."

"Large firms were against increased requirements for systematically important firms," The FSA said.

Banks fear they will have to simplify their structures to make living wills workable, a step that would deprive them of some tax and regulatory advantages.

The FSA said it recognized that policy solutions will have to be both radical and internationally agreed to be effective.

(Reporting by Clara Ferreira-Marques and Huw Jones; Editing by Ron Askew)