UK's bank supervision reform a muddle - report

British government plans to revamp banking supervision fail to end a muddle over who is in charge, and reform of the country's top market watchdog falls short of what's needed, according to a group of UK lawmakers.

Britain, hit hard by the credit crunch, was forced to nationalise Northern Rock and Bradford & Bingley banks, engineer a speedy merger of Lloyds and HBOS, and take a majority stake in RBS, all at huge cost to the taxpayer.

Parliament's treasury committee said in a cross-party report on the banking crisis that the government's proposed changes to the tripartite system of financial supervision were "largely cosmetic".

But Financial Secretary at the Treasury Stephen Timms said he did not agree, saying the changes were pretty far-reaching.

The government is seeking to improve how the finance ministry, Bank of England and the Financial Services Authority work together to better spot build-up of risks before banks are destabilised and require rescuing. The report said such a revamp still left unclear who decides a bank needs winding up or saving.

"Where responsibility lies for strategic decisions and executive action was, and remains, a muddle," the report said.

"When the dust eventually settles, the new system must answer the question 'Who gets fired?' if and when the next crisis occurs," it added.

Lawmakers were told regulators occupied "wormholes", only able to see one part of the financial system and unable to appreciate how risks in the broader picture were building up.

The committee said no new supervisory responsibilities should be decided until decisions were made about the precise tools for intervening in a future crisis.

The report offers little that is radical or not already being addressed at national, European Union or global levels. Many of its more domestically-focused recommendations may fall by the wayside in any case.

The committee reiterated its criticisms from earlier reports that the FSA "failed dreadfully" to supervise banks in the run-up to the credit crunch but it was changing for the better.

"The FSA must develop the confidence to take unpopular decisions when the economic boom begins again, in the face of both industry and the political class," the report said.

The lawmaker panel also recommended that senior banking officials should have a qualification in banking.

The FSA said the committee report acknowledged it had identified and rectified "historic mistakes", that the financial sector had clearly felt this change in approach, and it was actively making judgments about what might happen in future.

"We are using these expert judgments to test the robustness of firms' business models, their governance framework and to assess whether individuals are fit to run them - regardless of their individual qualifications," the FSA said.

The report said the FSA needed "automatic tools to put sand in the wheels of financial expansion" without having to prove beyond doubt such action is needed.

The government should ensure there are no banks "too big to save" and a "tax on size" through higher capital requirements would make very big, complicated banks less of a risk, the report said.