The bosses of the new financial watchdog warned bankers yesterday that their word would no longer be trusted and they will face "intensive" scrutiny.
At an event attended by hundreds of top bankers, Hector Sants, who will head the new Prudential Regulation Authority (PRA) when it is launched under the control of the Bank of England next year, vowed supervisors would "be brave" in challenging companies and said banks should be allowed to go bust.
He added: "Regulators cannot rely on the judgement of the management of the firms they supervise, and must take their own view formed from their analysis about the significant issues which affect the safety and soundness of the firm. Furthermore, where that judgement differs from the firm's management, the regulator must act."
Mr Sants currently runs the Financial Services Authority, which will be split in two to form the PRA monitoring firms' safety, and a new, consumer-focused conduct watchdog.
He said the FSA had placed too much trust in what bank managements reported. The result was the run on Northern Rock and near collapse of Royal Bank of Scotland and HBOS.
Financial companies will face tough, "proactive intervention" that will judge them against five categories, ranging from low risk to imminent risk and then winding up.
Paul Tucker, a deputy governor of the Bank of England, said: "This is a very big deal indeed.
"To a greater extent than ever before, but not exclusively, supervisors will work backwards from the end game: what happens when this firm fails and can we cope with it?"
Mr Sants said each big institution would have its own supervisor and that he and his top team would spend more time checking up on particular companies. But he admitted one of the big challenges would be to find people with enough experience for the job.
The FSA has suffered increased staff turnover in the run-up to its abolition. Mr Sants said the PRA would "reach out" to a more "diverse" group of potential employees than the ex-City crowd who make up a lot of the FSA workforce.
The PRA will regulate firms with £9 trillion of assets – about seven times Britain's national output, including many overseas companies.
Mr Sants and Mr Tucker signalled a clampdown on non-UK banks in Britain. They will seek to impose extra capital and liquidity requirements on any bank where it is needed and if a home supervisor in the European Union does not share information, the PRA will declare this publicly.
Ash Saluja, a partner at the law firm CMS Cameron McKenna, said: "UK subsidiaries of US and other foreign banking groups can expect the full force of the new resolution based regime. The PRA is heading for a potential clash with its EU counterparts if they don't have equivalent resolution planning."
Mr Tucker also said that the "shadow banking" system of opaque, non-bank deposit takers will be coming under scrutiny.
"Someone will think of a nice form of banking that comes under nobody whatsoever. We rely on you to tell us about that," he said.Reuse content