UK banks must lend more and build defences - regulator

A pedestrian walks past an old Bank sign in the City of London September 28, 2009.

LONDON (Reuters) - British banks must combine extra lending to help restore growth with efforts to strengthen their balance sheets to defend against threats from the euro zone, a senior financial regulator said on Sunday.

"The challenge of helping banks' resilience and boosting the availability of credit is complicated. But we cannot duck the challenge," Andrew Bailey, head of prudential regulation at the Financial Services Authority wrote in the Sunday Times.

Britain is trying to creep out of its second recession since the financial crisis and business leaders have identified a lack of credit as one of the main obstacles to recovery.

Bailey's challenge to banks reinforces a call on Thursday from the Bank of England's Financial Policy Committee (FPC) for them to take advantage of any lull in the euro zone debt crisis to tap markets for capital.

He said it was wrong to blame a slowdown in lending on tougher regulation.

"Banks can increase their resilience and still support lending if they take the right steps to remove bad loans and non-core assets from their balance sheets," Bailey, who also sits on the FPC, wrote in the Sunday Times.

Banks could raise capital by issuing new shares to investors, he added. That would help to restore confidence in a banking system shaken by the credit crisis, mis-selling of financial products and the fixing of the Libor interbank lending rate, Bailey wrote.

(Reporting by Peter Griffiths; editing by Patrick Graham)