BoE FPC says can support growth as well as stability

A man walks past the Bank of England, in the City of London June 15, 2012.

LONDON (Reuters) - The Bank of England's new financial risk watchdog said on Friday that it would be able to support economic growth alongside its primary aim of ensuring financial stability.

Chancellor George Osborne announced last month that he wanted the Financial Policy Committee to support government economic policies in the same way that its interest rate-setting counterpart the Monetary Policy Committee does.

The FPC will not gain full legal powers until next year, and there had been some uncertainty about whether its members thought having to take growth into account would distract from their main role.

During future lending booms, the FPC would be expected to tell banks to restrain credit - potentially hurting growth in the short term.

But a record of the FPC's June 22 meeting showed that the policymakers did not see a major conflict there.

"It was noted that the primary objective to protect and enhance resilience, and the new secondary objective were compatible. Indeed, the committee's recommendations ... over the past year had been specifically designed to build resilience while supporting lending and growth," the record said.

Last week the FPC published recommendations from the June 22 meeting, and said British banks should feel free to tap into their hefty cash piles to keep lending flowing into the recession-hit economy as the economic outlook darkens.

Britain's economy is suffering its second recession in four years, and the Bank and government are keen to keep credit flowing to support business investment.

Details of the FPC's discussion about this, published in the record on Friday, showed that the 11-member committee considered recommending that the Financial Services Authority - which currently regulate banks - completely suspend its liquidity guidance.

"Given, however, the uncertainty about how far regulatory requirements were the key constraint (on bank lending), and recognising the benefits that had accrued from the regime over recent years ... this option did not command support in current circumstances," the record said.

Instead, the FPC decided to recommend that the FSA make clearer to banks that they were free to eat into regulatory liquidity buffers during financial crises.

The Bank takes over most British financial regulation next year, and the FPC's main role is to stop credit booms getting out of control and to monitor risks that cut across individual banks and threaten the financial system as a whole.

(Reporting by David Milliken and Alessandra Prentice)