Big banks stepped up warnings on Tuesday that tightening capital rules too soon could stall economic recovery, but policymakers said the bailed out sector cannot rely on taxpayers again in future.

Regulators are drafting tough rules that will force banks to hold far more capital and lessen the need for the kind of public rescues seen during the credit crunch.

Bankers said the new rules spearheaded by the G20 group of leading countries also need better coordination and timing to avoid a patchwork of implementation emerging.

There is once again a real danger that the cumulative impact of doctrinaire policy could have some perverse and unintended effects on the economy and for wider society, said Stephen Green, chairman of HSBC , Europe's biggest bank.

Cumulative enhancement of capital ratios at the wrong stage of the economic cycle could easily withdraw credit from the economy and cause a new credit crunch. This in turn would interrupt and delay a fragile economic recovery, Green said.

Banks, despite public outrage at bonuses and huge bailouts that have wrecked government finances, appear more willing to question new rules that are expected to dampen profitability.

This is in spite of the G20 reassuring them that the bulk of new requirements will not take effect until the end of 2012 so that economic recovery has enough time to find its feet.

The Basel Committee on Banking Supervision, a global body that is mapping out new bank capital rules, will also test their combined impact next year before fixing tougher levels.

Major banks like HSBC face a plethora of changes, ranging from higher and better quality basic capital to new caps on leverage and possible liquidity and capital surcharges because of their sheer size and cross-border reach.

Britain's government is due on Wednesday to unveil plans for a sweeping new law to crack down on bank bonuses, beef up enforcement of financial rules and make it easier for investors to group together to seek compensation.

Andrew Bailey, Chief Cashier at the Bank of England, told a banking conference in Spain the sector cannot justify relying on public money to douse the fire during a crisis.

And we also cannot allow conditions to exist where risks are taken on the basis that this backstop exists, Bailey said.

Regulation seeks to re-build fire prevention systems with action on capital and liquidity requirements. Prevention might also involve re-drawing the financial landscape, its structure, Bailey added.

Some policymakers fear that topping up capital and liquidity levels won't be enough to avoid a public bailout in future and that big banks should be split up to ringfence deposits.

The Financial Services Forum of top banks urged the U.S. Congress on Monday not to pursue big bank break-up legislation, saying it could lead to long term damage to the economy.

Spain's Banco Santander echoed this on Tuesday.

Limiting or penalizing the size of banks through greater regulatory capital requirements will not solve the problem, Santander chairman, Emilio Botin, said.

Bankers said not all countries are singing from the same regulatory hymn sheet despite the G20's coordinating efforts.

We're at risk of pursuing so many different complicated subjects that we make slow progress on all of them. I would be prioritizing capital and liquidity, Peter Sands, chief executive of Standard Chartered told the Financial Times.

HSBC's Green said more capital for bank trading books would certainly happen in Europe as Brussels and Basel are pressing so hard, but he said it was uncertain if it will be implemented more broadly across G20.

Credit Agricole , France's biggest retail bank, said that changes in rules for banker pay had been felt in London more than anywhere else.

There is an impact, but a small one, Credit Agricole Chief Executive George Pauget said at the Reuters Finance Summit on Monday. It's mainly in London, where it can be difficult to hire specialists in specific businesses. We'll see rules converging, but before that it can cause some difficulties, he said.

A top EU insurance watchdog urged regulators to stand firm.

This is the moment of truth. There are clear measures in there, in the list of G20 recommendation, and surely they need to come to life on both sides of the Atlantic, Gabriel Bernardino, chairman of pan-EU insurance regulatory body, CEIOPS, told a financial conference in Frankfurt.

(Writing by Huw Jones; Additional reporting by Steve Slater; Editing by David Cowell)

United kingdom