By William James
LONDON (Reuters) - Reform of Britain's scandal-hit banking industry is too piecemeal, undermining its ability to boost the economy and leaving it exposed to further crisis, the lawmaker who drafted initial plans for an overhaul told Reuters.
Andrew Tyrie, the chairman of a government-appointed banking commission, said he was concerned that the government was ignoring important elements of his blueprint for reform and sometimes mistakenly favouring non-binding guidelines over statutory legislation.
"The commission is not yet happy," Tyrie said in an interview, referring to his own parliamentary panel. "We're watching and we're not going to go away," he said, sipping black tea in his office overlooking the River Thames.
The government asked his commission to identify the failings that took Britain's banks to the brink of collapse in 2008 and triggered damaging mis-selling and rate-fixing scandals, and to suggest changes to ensure such mistakes were never repeated.
Many of the changes that Tyrie's commission recommended in June were included in the government's Banking Reform Bill, legislation designed to stabilise and protect the financial sector. It is expected to become law early next year.
But Tyrie said the government was being too selective.
"We don't know which tools might become crucial, but what we do know, and what the Banking Commission concluded, is that reforms and improvements are needed on many fronts, and those fronts are interlocking," he said. "Taken together they will give us a much better chance of protecting ourselves."
Tyrie highlighted the government's plan to regulate banks' leverage ratios - the total amount of lending versus capital - which his commission has described as "the single most important tool to deliver a safer and more secure banking system."
The government has said it will grant oversight over leverage to the Bank of England's Financial Policy Committee (FPC) in 2018, but has given itself the right to change its mind in 2017.
"In other words, they are not committing to handing powers over to the FPC in five years' time. They're committed to (only) taking a look at whether they will," said Tyrie.
Tyrie also worries that powers to claw back bankers' bonuses aren't being written into law and that regulators won't get new powers to intervene at banks where leadership may be failing.
In the past, Tyrie has complained that significant changes to the banking reform bill were being rushed through so it could become law in 2014, saying it was crucial to ensure such revisions were in line with his commission's proposals.
Britain's ability to bounce back from three years of economic stagnation also hinges on the reforms because without greater confidence in the strength of the banking system businesses will not borrow, invest and grow, Tyrie said.
"The recovery is not going to be secured by some grand gestures on a few massive projects," he said, outlining the limits of government intervention in the economy.
"It's going to be secured by the business decisions of hundreds of thousands of people, small businessmen and sole traders, underpinned by an improvement in confidence."
He said the Royal Bank of Scotland, which the government bailed out in exchange for an 82 percent stake, should be doing much more to support small businesses.
Tyrie's commission has been pushing the government to consider hiving off the bank's toxic assets into a separate 'bad bank', freeing up the 'good bank' to lend more, but a promised government analysis on the subject has yet to be published.
He said that review, being prepared by investment bank Rothschild and due in the next two months, needed to be arrived at "wholly independently and not on the basis of restrictive guidance by RBS, regulators and particularly government."
(Editing by Andrew Osborn and Ruth Pitchford)