By Huw Jones
LONDON (Reuters) - Badly run banks in Britain will be forced to hold substantially more capital until they can show that internal risks are under control, the Bank of England said on Monday.
The Bank's Prudential Regulation Authority (PRA) published a consultation paper on how it will use powers to require lenders to hold extra capital to cover risks that are not generally covered by a bank's minimum core buffer.
Regulators have said that poor governance and risk controls have allowed misconduct, like the attempted rigging of interest rate and currency benchmarks, to flourish, resulting in a string of hefty fines which in turn is prompting supervisors to consider extra capital requirements.
"The PRA therefore proposes that firms with significantly weak risk management and governance should hold additional capital in the form of a buffer to cover the risks posed by those weaknesses until they are addressed," the PRA said in its consultation paper.
Banks with poor internal controls or governance would have to hold extra capital equivalent to 10 to 40 percent of its core buffer and some of the additional capital it is already holding.
"The PRA may decide on a larger scalar within that range should the PRA buffer assessment reveal greater vulnerabilities to stress," the paper said.
A bank would be required to produce a plan to address the failings in risk controls and governance. Once the failings have been addressed, the extra capital requirement would be removed.
The changes reflect tougher European Union bank capital requirements being phased in.
Bankers said that the likelihood of lenders being saddled with such hefty extra capital buffers will be lessened as the Bank introduces a separate set of new rules requiring senior bankers to be directly accountable to each major bit of the business.
Under this new "senior managers' regime", a named individual will be directly responsible for governance and risk management, a step regulators believe will make failings less likely.
The new buffers would be phased in from January 2016 with full compliance by January 2019.