By Philip Aldrick, Banking Editor Published: 9:19PM BST 22 Oct 2009  Lord Turner: challenge to industry  In a clear challenge to the industry, Lord Turner of Ecchinswell, chairman of the City regulator, said he had "a range of levers" at his disposal to block "excessive bonus payments". "We will be talking to banks about whether their bonus pools are appropriate and if they aren't we will have a full and frank discussion with them," he said.  Britain's banks will disclose their bonus plans to the FSA next month and will begin paying staff in February. At both Barclays and Royal Bank of Scotland, investment bankers are on course for packages worth more than an average of £200,000 each.  Speaking after the FSA published a discussion paper on regulatory reform, Lord Turner stressed that "where large profits are being made we will be encouraging banks [to use them] for a rapid build up of capital ... rather than to support excessive bonus payments".  However, he added: "We don't mind if the bonuses are paid in shares." He declined to detail what levers were at his disposal.  Larger capital reserves, the key measure of financial strength, formed the centrepiece of the FSA's discussion paper on reform of banks regarded as "too-big-to-fail". Lord Turner said about the new regulatory framework: "We are absolutely clear it will be a regime of significantly higher capital requirements." The current requirement is 8pc.  His position pits him against the banks, who argue that the more capital they are made to hold, the less credit they can extend to businesses and households, slowing a potential recovery. Angela Knight, chief executive of the British Bankers' Association, said yesterday: "Reform comes at a cost. There is a balance to be achieved between enhancing stability and ensuring banks are not unduly constrained in their ability to lend."  The FSA is attempting to rubbish the banks' argument by demonstrating that higher capital requirements are beneficial to the economy. According to a preliminary report prepared for the City watchdog by the National Institute of Economic and Social Research (NIESR), raising capital requirements by three percentage points, to 11pc, would benefit Britain by £91bn by "reducing the likelihood of a crisis imposing costs on the economy", the FSA said. The final NIESR report is due next week.  In comments that put him in the same camp as Mervyn King, Governor of the Bank of England, Lord Turner also indicated that he is not against breaking up the banks. The difference between the regulators, Lord Turner said, is that "we [the FSA] believe we should achieve that through capital requirements".  "If [a capital surcharge on size] means some of their trading moves out of commercial banks and into hedge funds, then that's fine. If banks tend to be a bit smaller as a result of this, then that's fine," he added. "I'm not sure we are saying different things."  Tim Plews, regulatory partner at Clifford Chance, noted: "Is there much of a gap between King and Turner? King says enforce separation; Turner says capital changes will bring about separation voluntarily."  Mr King's calls to break up the banks were attacked by both Gordon Brown and Alistair Darling, in comments described as "extraordinary" by George Osborne, shadow Chancellor. He added: "We will use the Government's shareholding in Britain's banks as a lever to create more, smaller banks. I think there is a case for separating risky proprietary trading from retail deposit taking."  The FSA's discussion paper detailed how "systemically important banks" will have to hold "significantly" more capital than others as insurance against the "dangers" posed to the financial system should they collapse. Lenders with a global reach, including Barclays, HSBC and Royal Bank of Scotland in the UK, will also be encouraged to create a legal separation between local subsidiaries so the UK Government is not responsible for bailing out the entire group – as it had to with RBS.  "We are reasonably in favour of the idea," Lord Turner said, as it would "reduce [banking] liabilities as a proportion of a home country's GDP".  Also central to the proposals is a "living will" that "too-big-to-fail" banks must draw up to prepare for an "orderly" wind down in the event of failure. If the FSA decides a "living will" does not go far enough, it can demand "restructuring of certain parts of the group [which] could include clear separation between retail deposit taking business and businesses involved in proprietary trading activities", it added.  Key proposals for too-big-to-fail banks  - A "capital surcharge" that will work as a tax on size  - Split global banks into a "constellation" of legally separate, local subsidiaries to place responsibility for a bail-out in the hands of local rather than home regulators  - Create "living wills" that set out how to wind down a bank without jeopardising financial stability  - Examine a restructuring to legally ringfence or offload trading activities  - Limit bonus payments to use profits to replenish capital  - Hold more capital against trading activities  - Assess the overall cost of proposed reforms
The Financial Services Authority will ban Britain's banks from paying large    cash bonuses to staff this year, forcing them instead to channel the vast    majority of profits into bolstering their financial strength.