Watchdog agrees to cost new bank rules

"This will include discussion of the possible design of living wills and their implementation at both national and global level," the Financial Services Authority said.

Chancellor Alistair Darling, has said he will propose a law to force banks to draw up living wills or contingency plans to wind down quickly in times of a crisis so that the broader financial system is not destabilised.

The FSA said its discussion paper will also look at "trade offs" between raising bank capital levels to lessen the need for future government bailouts and the effect on lending ability.

Banks warn they can raise capital levels and keep lending to businesses and consumers at the same rate.

"There is a need for a comprehensive analysis of the combined impact of the different elements of regulatory reform," the FSA said.

It was commenting on responses received to its Turner review -- named after the watchdog's chairman, Adair Turner -- which made policy recommendations to apply lessons from the worst financial crisis in over 70 years.

The strongest concern raised by respondents was the need for international consistency in designing and implementing tougher rules so that London is not at a competitive disadvantage.

Turner raised hackles in London's financial district in August when he said the FSA has to be "very wary" of seeing the competitiveness of London as a major aim of UK financial policy.

"The FSA's analysis of the feedback is a rag-bag of familiar ideas about regulatory reform," says Simon Morris of law firm CMS Cameron McKenna.

"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)