UK may need more steps to unblock credit - FPC's Turner
LONDON (Reuters) - British policymakers may have to do more to get lending flowing around the economy, combining bank regulation and monetary policy creatively to ward off deflation dangers, Britain's top bank regulator, Adair Turner, said on Friday.
Turner, the chairman of the Financial Services Authority, is tipped as a potential successor to Bank of England Governor Mervyn King, and he was speaking in his role as a member of the BoE's Financial Policy Committee, a new regulatory body at the central bank in charge of systemic threats to financial stability.
The new committee has tried to spur lending by urging the bank regulator FSA to relax rules on how much ready cash banks have to hold, in light of a new Bank facility that makes it easier for banks to turn illiquid assets into cash in an emergency.
Some FPC members even considered suggesting the FSA suspend liquidity guidelines altogether, but they shied away from this due to doubts about how big a constraint liquidity is on lending and concerns this might encourage banks to revert to unstable sources of funding.
Such steps helped to improve the effectiveness of monetary policy such as the Bank's quantitative easing asset purchases, Turner will say at an event in Manchester later on Friday, according to a text of his speech released in advance.
"Faced with the risk of continued deflation, we need to think creatively about the combination of policy measures which will both aid economic recovery and help create a more stable future system," said Turner.
"The package of measures announced over the last three weeks reflects the integrated approach required: but it is possible that further creative policy combinations will be needed as we observe the impact of these measures and learn more about the challenges of the deleveraging process," he said.
The government and the central bank announced a scheme to lower banks' funding costs in return for more lending to businesses. In addition, the Bank is providing extra cheap six-month funding against a wide range of collateral.
"We do not know precisely the balance between supply and demand factors in explaining the lack of credit growth; but since supply is certainly part of the story, it makes sense to use integrated policy to ease any supply constraints," said Turner.
"But over time, as we observe usage of the Funding for Lending Scheme, we will learn more about the supply/demand balance, and about whether the present package of measures is sufficient," he said.
Relaxing capital rules for banks, however, was not an option, Turner said, as many banks had to pay more for funds because markets were concerned that their capital was insufficient to absorb losses that may arise in times of stress.
"Relaxing bank capital requirements to stimulate lending could easily backfire -- it could increase the cost of funds and thus the cost of lending," he said.
(Reporting by Sven Egenter)
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