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Darling set to impose heavier capital on risky banks in white paper

Chancellor Alistair Darling is set to crackdown on the financial services industry by imposing heavier capital and liquidity standards on banks that pose the greatest risk to the financial system, according to the Financial Times.

In a white paper, due out today, Darling will instruct the FSA to draw up an implicit regulatory tax for the riskiest institutions.

It will undertake a risk assessment of each company it regulates so it clearly understands the risk of the bank failing as well as the toll any failure would take on the financial system.

The report says this could encourage banks to split into smaller, less risky entities or shift their operations abroad to duck the new regime.

The Chancellor is also set to insist retail and investment bank are run simply enough so that the authorities can wind them down over a weekend if necessary rather than being forced into nationalisation or bankruptcy.

A new Banking Act will give the FSA a statutory role to support wider financial stability.

The Financial Times adds that the Chancellor will force banks to fund new measures to boost confidence in the financial sector such as providing more education in schools.

Meanwhile, the Times has reported that the FSA will cap how much a bank can lend during the good times to ensure that it is not overstretched in the event of a economic downturn.

The newspaper also says the Chancellor will force health warnings to be used on financial products similar to those used on cigarette packaging, to indicate how risky they are.

The white paper is expected to be released early this afternoon.

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