Britain needs a safer and more robust banking system, its top central banker said on Tuesday, urging the country to work with President Barack Obama on his plans for a drastic overhaul of the global financial system.

Regulators need a range of new policy tools to avoid a repeat of the credit crisis which brought the global economy to the brink of collapse, Bank of England Governor Mervyn King told lawmakers, adding debate on the issue will last many years.

We do need a safer and more robust system ... that may turn out to be smaller, King said in testimony before the Treasury Select Committee.

Obama's aggressive plans to limit risk-taking in banks -- which sent a ripple through financial markets last week -- include limits on their exposure to hedge funds, private equity and proprietary trading, and capping their size.

There's no doubt the United States will be very keen to work with the United Kingdom and other countries in discussing radical reform in this area, King said. It is better if we can work in conjunction with other countries.

The Bank of England stands to gain bank supervisory duties if the Conservative Party -- which polls say is favorite to win a 2010 election -- sticks to its plan to abolish the Financial Services Authority.


The banking system might well become smaller as a consequence of any newly imposed measures, central bankers told the Committee, and it was key that the banking system did not impose an undue burden on the UK taxpayer in case of a bailout.

Wholesale creditors should face possible losses if banks landed in trouble, King said, rather than relying on an implicit guarantee governments would bail out banks because of their importance for the broader economy.

They need to get to a structure of the financial sector which is one in which those who provide the financing for it believe rightly that they will not be bailed out when they get into trouble, King said.

Politicians in Britain, France and Germany have welcomed Obama's measures, which come amid a public outcry over lavish bonuses only a year after excessive risk-taking by banks brought the global financial system to the brink of collapse.

British banks had to be bailed out in hugely costly programmes last year, with lenders such as Royal Bank of Scotland and Lloyds now largely state-owned, making the country one of the hardest-hit by the crisis in Europe.

Conservative George Osborne, set to be Britain's finance minister if his party wins this year's election, has backed Obama's plans, as has Prime Minister Gordon Brown's ruling Labour Party.

But financial services minister Paul Myners has said the Obama plan was tailor-made for the idiosyncratic problems in the United States.

(Writing by Douwe Miedema; Editing by David Holmes)