Bermuda's banks should consider splitting their businesses into local and exempted companies in order to raise the capital they need to expand, former Premier Sir John Swan said yesterday.

Speaking on proposed changes in the 60/40 rule which requires Bermudians to have the majority stake in companies on the Island, he said it was time the Government stopped pussyfooting around and took action.

He said: "We could split the banks, allow them to split in two, and have exempted banks. We have ACE and XL and other companies doing well.

"We would have local banks and exempted banks.

"The local banks would carry out their functions -- the advantage of this, once you allow this, is that others would also be allowed to come in an exempted capacity to do certain types of business.

"The bank could raise its capital and go off and be an international bank and do all it has to do but the real estate and the domestic side remains.

"And the international banks become tenants of these operations so revenue from rents and proceeds would allow those dividends to be paid out.

"That would take a simple piece of legislation -- it wouldn't change the 60/40 rule.

"It would just allow banks and other institutions, maybe the power companies like Belco and Telco and a few others -- don't think it's just a banking issue -- there's a lot of capital which will have to be raised if Bermuda's going to find itself in the 21st Century in a meaningful way.

"The way to do that is by allowing an openness to this process but at the same time there need to be some safeguards.'' He added: "Shops could under certain conditions be owned and managed by outsiders, whether we bring in a Gucci or a Christie's or whatever else, so you bring everything up to first class.

"You go from mediocrity to a higher standard.'' He said Bermuda needed to change rapidly and cited Japan as a country which had come a cropper because it hadn't adapted in recent years.

He said: "We have procrastinated. Unless change comes much faster we will feel the consequences.

"Bermuda has to start a dialogue -- change in its immigration policy, change in its commercial affairs, change in its tourism.'' He said Bermuda was restricting work permits at a time when worldwide markets were requiring more labour and that the planned six-year limit would discourage the best foreign workers from coming which in turn would hit productivity.

Swan's warning Bermuda's declining birthrate meant the Island was not replacing its population, said Sir John, and the growth in the economy and population had been caused by locals marrying foreigners and from migrant workers. He said employees and their families would take a short-term attitude to work and Island life.

"You end up creating mediocrity. It's a ticket to disaster.

"To hang a cloud over anybody's head, to ask them to come to Bermuda for three years, or six years, or nine years, has to tell an employer he's going to have problems getting a good employee.'' He added: "America recently just pulled in 40,000 Indians to work in Silicon Valley because there is such a shortage of manpower.

"You see places like Canada have manpower shortage problems. Europeans who we used to be able to get to come to Bermuda at the snap of our hand no longer come.'' The former Premier said the country couldn't afford to make policy decisions which would harm business without risking recession and that proposed capital gain tax changes in the US could see business opting for the US rather than Bermuda.

He told Hamilton Rotarians yesterday: "To be small today is to not get economies of scale. If you are small you must create something which is very unique.

"We happen to be small, we are 62,000 people -- a small size corporation in today's terms.

"The world is saying with technology we want things speeded up not slowed down, we have to make precise decisions, faster in a more judicious way.''