UPDATE 1-UK FSA's Turner plays down writing off QE gilts

Sat Oct 13, 2012 5:12pm BST

* Turner: dilemma of bank capital vs lending trade-off

* Tucker says new rules in banks' interest after bailouts

* Turner backs separate "bail in" bank bond

* Turner: need minimum absolute capital on bank assets

By David Milliken

TOKYO, Oct 13 (Reuters) - British financial regulator Adair Turner, a contender to be the next Bank of England governor, played down on Saturday the suggestion that he supported writing off government bonds purchased by the BoE to boost the British economy.

Turner said on Thursday that he backed recent unconventional steps by the BoE, and thought it could go further, and there have been media reports suggesting he backs cancelling the gilts bought by the BoE as part of its quantitative easing programme.

At a question and answer session on the sidelines of an International Monetary Fund meeting in Tokyo on Saturday, Turner declined either to back this or to clearly rule it out.

"The whole point of my speech on unconventional policies was to provide a justification of what we have done over the last three months in terms of unconventional policies," he said.

"I pointed out there were other things we can do. As for the specific idea of cancelling gilts or permanent monetisation, I have to say that was reported by my good friend (BBC reporter)Robert Peston, but that was Robert's idea, not my idea," he added.

Turner is chairman of Britain's Financial Services Authority(FSA) and serves on the BoE's Financial Policy Committee, which has responsibilities for bank regulation, though not for monetary policy.

In a speech during International Monetary Fund meetings in Tokyo on Saturday, Turner spoke of the tricky balance of wanting banks to hold enough capital to remain resilient but not to the extent it chokes off credit to struggling economies.

"If we increase capital ratio requirements and leave it entirely to private banks to decide when and how to achieve those higher ratios, we may simply provoke further deleveraging and deficient lending supply," Turner said.

The Bank of England's FPC agreed in September to allow UK banks to tap into their surplus capital and cash-like liquidity cushions to help businesses.

Banks have long argued that tougher capital rules will make it hard to keep lending to businesses but they were largely ignored until it became evident that economic recovery remains a distant prospect for many countries.

Turner said there was a need to engineer rapid increases in bank capital resources through stress-testing lenders to define quantities of capital for each one, with a public backstop if the lender fails to raise that amount privately.

There have already been several stress tests of EU banks but they have failed to draw a line under problems at euro zone based lenders.

Turner said a public backstop in the single currency area would only be credible at the "federal" euro zone level, a reference to how some national government debt has become too low rated to be of use in bolstering banks.

BIG BANKS

Five years after the financial crisis began regulators have still not solved the question of how to wind down a failing bank without disrupting markets and calling on taxpayers for cash.

Turner backed a "clearly defined" bond a bank would sell and would bear losses to "bail in" the lender when in trouble -- a view at odds with some Bank of England officials who don't want a separate bail in category of debt.

These ideas are in a draft EU law for helping cross-border banks but some countries fear such bonds would put investors off and progress with the measure has been slow and their introduction could be years away.

"Though we are heading towards agreement around those principles - we are not there yet and we certainly haven't implemented it," Turner said.

Bank of England Deputy Governor Paul Tucker, also a contender for the governor's job, said at an IMF meeting on Friday that making it easy to wind down big banks without taxpayer help would be in the sector's interest.

"If there is to be another episode of massive public sector taxpayer solvency support to sort out a crisis, once we have eventually got through this one, I think the backlash would be almost uncontainable," Tucker said.

Turner said there was also a need to tackle how banks apply "risk weights" to calculate how much capital is needed to cover different types of assets in case they lost value.

The mistake made by regulators in the past was not to have a minimum amount of capital for each asset rather that relying on banks to calculate themselves how much capital is needed.

"And I suspect we should and will migrate to such a system over time," Turner said, adding that bank balance sheets remained too big.

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