* Bank structure not best tackled by legislation - HSBC
* Capital, people are mobile and firms can move - CEO
* UK commission on banking industry to outline remit Friday
LONDON, Sept 23 (Reuters) - HSBC's chief executive said breaking up banks could create more risk and lawmakers should not set out how lenders work, a day before a UK panel steps up a probe into whether banks are too big and powerful.
"Issues of bank structure are not best tackled by trying to legislate what banks can and cannot do, but through capital requirements and enhanced supervision," Michael Geoghegan, the CEO of Europe's biggest bank, said in a speech on Thursday.
"Breaking up banks would result in less diversification, either by geography, by business line or both. That means concentration and correlation of risk, which in turn drives systemic risk," Geoghegan said, according to the text of remarks drawn up for delivery in Singapore.
Britain's Independent Commission on Banking (ICB) is assessing the structure of the industry, aiming to reduce systemic risk, mitigate moral hazard and promote competition. An "issues paper" refining its scope is due out on Friday.
The commission, which has a year to report, may consider whether retail and investment banking should be separated.
It is also expected to consider other measures, such as setting up firewalls or requiring independent capital and funding for units, or focus on whether there is a lack of competition in High Street banking.
Geoghegan said no banking model emerged from the financial crisis with a clean sheet, and said diverse business models can mitigate systemic risk and aid financial stability.
Banks should be allowed to go bust, he said: "Shareholders and bondholders should take the pain, not the taxpayer."
Banks need to have a mechanism in place so they can be wound up safely if they hit trouble, he said, adding that HSBC and three other UK banks have been part of a pilot study.
He said it was impractical to develop detailed recovery plans, however, and said "ring-fencing capital and liquidity could precipitate trouble" and banks should have the flexibility to manage more freely.
HSBC has warned that big banks could move overseas if the ICB forces banks to break up.
"Capital is mobile, and it will go where it can be allocated most efficiently. People are mobile too, and if firms move their activities, some economies could suffer real long-term damage," Geoghegan said.
HSBC is in the process of choosing a new chairman, and Geoghegan is one of the leading candidates. The bank is expected to make the decision at a board meeting on Sept. 29. (Reporting by Steve Slater; Editing by Michael Shields)