Proposals set out by Britain's financial regulator would require banks to retain more capital, making them less profitable but safer.
In a report aimed at identifying ways of preventing a repeat of the global banking crisis, the Financial Services Authority (FSA) also called for a new European regulatory body and a global agreement on how international supervisors might spot and address risks to financial stability.
The report was commissioned by British Prime Minister Gordon Brown at the height of the banking meltdown last October.
It suggested that banks hold a minimum core tier one capital ratio, a key measure of financial strength, of 7% during the peak of the economic cycle. Current British and international guidelines set out a minimum core tier one ratio of 4%. Core tier one capital measures how much money banks have in reserve to cope with unexpected losses.
This would make banks less profitable, but would equip them to weather storms such as the credit crunch.
The regulator also proposed that banks build up their capital reserves during boom times, creating a buffer that can be run down when the economy sours. This would help soften the impact of a recession by ensuring that lenders can maintain the supply of credit as the economy slows.
The report, authored by FSA chairman Adair Turner, called for the creation of a new EU regulatory body which would help national supervisors identify risks to the financial system caused by changes in credit availability, debt levels, and asset prices.
But, under the FSA plan, national regulators would retain primary responsibility for supervising firms in their jurisdictions.
The authority's report also covered pay and bonuses. The watchdog said it was considering making it an FSA rule for major firms to fix salaries and bonuses based on risk management.
The FSA is also continuing to look at ways to increase the protection available to British savers if a bank fails. It said significant changes had already been made to the Financial Services Compensation Scheme (FSCS), including increasing the limit for savings covered by it to £50,000 for individuals and £100,000 for joint accounts.
The watchdog said that although it had no plans to introduce 100% protection, it was consulting on whether the current limit should apply to each banking group or each brand.
