Fears of bank exodus sparked by FSA reforms

City bankers fear that regulatory reforms to be revealed by the Financial Services Authority this week could force banks to quit London unless other countries agree to adopt the new standards too.

Lord Turner, the watchdog's chairman, is being urged to lobby overseas regulators rather than impose tough new regulations unilaterally. He is expected to require banks to maintain much higher levels of liquidity and capital and will subject hedge funds to banking-style rules for the first time.

The FSA's reforms come as the G20 leaders, who met in Horsham yesterday ahead the London summit on 2 April, to discuss how tougher regulation can be introduced across the globe to prevent another banking collapse. Officials are looking for agreement on regulating the shadow banking system, such as hedge funds, as well as tax havens, and on measures to toughen the International Monetary Fund and the World Bank.

Lord Turner's reforms will mean a return to old-style banking, with lenders encouraged to raise deposits from savers, rather than wholesale markets. He will also make it harder for banks to devise complex off-balance-sheet investment vehicles holding toxic assets, or to gamble their own money.

But building societies are concerned that they could be encumbered by rules designed for riskier lenders, and City financiers fear banks may seek regimes overseas that still offer light-touch regulation.

"There is a worry," admitted Angela Knight, the chief executive of the British Bankers' Association. "We still have a system that makes London an attractive centre and we've got to make sure business does not cease to be done here."

Lord Turner intends to lobby the Basel Committee, which sets international capital standards, but rules it introduced last year have been ignored in the US and adapted in Europe. City bankers fear either that Lord Turner's proposals will be watered down to produce a global standard or will apply only to the UK. One investment banker said: "Turner has really got to push for agreement on this."

A Building Societies Association spokesman said: "What worries us is that he will take a blanket approach and over-regulate to a high level across the board, rather than concentrate the effects on areas of greatest systemic risk."

Lord Turner's proposals were outlined to the Financial Stability Forum, hosted by the FSA in London last week, when it agreed principles on bankers' pay and cross-border co-operation. The forum, which China recently joined, is increasingly seen as the natural body to co-ordinate efforts to strengthen global regulation.

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