The bosses of the new financial watchdog warned bankers yesterday that their word would no longer be trusted and that they would face “intensive” scrutiny.
At an event attended by hundreds of top bankers, Hector Sants vowed supervisors would “be brave” in challenging companies and said banks should be allowed to go bust.
He added: “Regulators cannot rely on the judgment 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 judgment differs from the firm's management, the regulator must act.”
Mr Sants will head the new Prudential Regulation Authority (PRA) when it is launched under the control of the Bank of England next year.
He currently runs the Financial Services Authority, which will be split in two to form the PRA to monitor firms' safety and a new consumer-focused conduct watchdog.
He said the FSA had placed too much trust in what banks' management 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, 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 the UK.
They will seek to impose extra capital and liquidity requirements on any bank where it is needed and if a home supervisor in the EU 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.”