The British government will have a big part in the country's banking sector for years to come but competition and choice for consumers must be maintained, finance minister Alistair Darling said on Friday.
Britain has nationalised Northern Rock bank and taken majority stakes in Royal Bank of Scotland and Lloyds Banking Group.
"The government will have a significant role in the banking sector for some years to come," Darling told a financial services conference.
The banking industry, shored up by billion of pounds of taxpayer's money, was still consolidating.
"So we do need to be vigilant and make sure choice and competition is maintained," Darling said.
The worst financial market crisis in over 80 years has helped to tip many economies into recession, including Britain's, sparking a root-and-branch review of how markets are supervised to plug gaps highlighted by the credit crunch.
One gap is the lack of efficient supervision of how risks from one bank can affect broader market stability, known as macro-prudential oversight.
"I support the establishment of a macro-prudential body in the European Union. And both the Bank of England and the Financial Services Authority should play a leading role in the body," Darling said.
There has been public outcry over big bonuses and pensions paid to some British bankers whose banks have been bailed out by taxpayer money.
Adair Turner, chairman of the FSA, said the welter of new financial rules will dent UK economic activity by about one percent as high earners are reined back.
Turner said banks will have to set aside more and higher quality capital than in the past but that did not mean an increase in capital ratios straight away, though some banks were already above what was needed.
"We don't want to increase capital ratios in the immediate future, instead the ratios should be falling as capital buffers are used to absorb losses and maintain lending to the economy," Turner said.
The FSA may have to issue corporate governance guidance specifically for board members of financial firms to ensure they have the specialist knowledge about such a complex sector, Turner said.
SUPERVISORY DEBATE
Darling said he has also proposed an independent EU regulatory standard setter but reiterated that supervision should remain in the hands of national supervisors.
Last week, EU leaders backed creating two new bodies, one to supervise macro systemic risks.
But the second EU body would go further than Darling's standard setter and be able to impose binding measures on a national watchdog deemed to take insufficient action.
Britain is also looking at how to beef up domestic macro supervision, sparking a debate over whether it should be handed to the Bank of England, a move the FSA is arguing against.
"We have the Bank of England, responsible for monetary policy, and now with a statutory remit to maintain financial stability," Darling said.
"While the FSA is the supervisor and regulator. Of course, you can shift the boundaries around, but what matters is that both work closely together," Darling said.
He called for more supervision of hedge funds and that banks should build up reserves in good times for difficult conditions.
