Alistair Darling will suggest that the Financial Services Authority and its counterparts elsewhere should monitor the overall financial positions of banks and other institutions to preempt irresponsible behaviour.
They would intervene to stop banks “overleveraging” if their capital reserves are not large enough to balance the loans they have made. The regulator would effectively be able to prevent a repeat of episodes such as the takeover of ABN Amro by Royal Bank of Scotland, Treasury sources disclosed.
The plan, one of Britain’s main proposals for the G20 summit on April 2, will be discussed by world finance ministers at a hotel in Sussex tonight.
It is believed to be contained in a report from Lord Turner of Ecchinswell, the FSA chairman, on regulatory reform to be published next week.
Mr Darling foreshadowed the move last night when he said that both national and international regulators needed additional powers to help to restore confidence in the system.
Under regulatory powers operated under the so-called Basle 2 agreement, different parts of a bank, such as mortgage lending and loans to companies, are assessed separately by regulators. Under Mr Darling’s plan the institution’s overall position would be monitored.
Banks must set aside the equivalent of 8 per cent of the value of all their loans as a cushion. They also have to convince regulators that their own assumptions about worst-case scenarios are reasonable and that their business model would hold up. At the moment, regulators can force banks to provide a bigger capital cushion if they think that a bank has made very risky loans or investments.
In an interview with Channel 4 News, the Chancellor also signalled his hopes for an agreement on bringing offshore tax havens into the global regulatory system, saying there had been a “sea change” in international attitudes to the issue.
Mr Darling said the experience of recent months had underlined the importance of ensuring that the banks built up their capital reserves when times were good and that they did not overstretch themselves.
“That is one of the problems that we have had to face,” he said. “Banks took on too much risk – RBS, for example, buying the Dutch bank ABN. They took on too much risk with catastrophic consequences for them and the wider economy.
“Making sure that they have got adequate capital against times when things are tough, I think that is very, very important.”
Ultimately, he acknowledged, it was an issue that would require international agreement if it was to be effective. But there was a need for action at national and European levels as well.
National regulators such as the FSA needed the “backstop power” to tell the banks: “Look, you are overstretching yourself, you can’t go any further.”
The Chancellor suggested that initially the International Monetary Fund could act as a global “watchdog” for the banking system. He said he also hoped to see agreement at the G20 on the regulation of the “shadow” banking system – such as hedge funds – and offshore tax havens.
Allegations involving the financiers Bernard Madoff and Allen Stanford had, he said, highlighted the need for international action.