UK may need unorthodox policies to revive economy - Turner

The chairman of the Financial Services Authority, Adair Turner, leaves Downing Street in central London May 28, 2012.

LONDON (Reuters) - Britain may need to adopt more unconventional policies to revive its economy, one of the top candidates to become the next Bank of England governor said on Friday, citing recent efforts to spur bank lending to companies.

Speaking at an event at the South African Reserve Bank, Adair Turner also said regulators must break with the "intellectual delusion" that there were unlimited benefits from more complex financial innovations and credit creation.

Turner, who is chairman of bank regulator FSA and a member of the BoE's Financial Policy Committee, has put his name forward to succeed Mervyn King as head of Britain's central bank next year.

He cited the Bank's Funding for Lending Scheme for banks and the FSA's relaxation of liquidity rules as examples of the policies needed.

"This is an innovative combination of policies and one which lies far outside past orthodoxy," he said, according to the text of his speech.

"And if these measures prove insufficient, we may have to consider further policy innovations and further integration of different aspects of policy to overcome the powerful economic headwinds created by deleveraging across the developed world economies," he added.

Bank deputy governor Paul Tucker is seen as the favourite to succeed King, with Turner and former Bank chief economist John Vickers also in the running. Chancellor George Osborne is expected to announce his choice on December 5.

Three independent reviews of the central bank's operations have recommended it should seek a broader range of views when producing inflation and growth forecasts and clarify the role of its key policy-setting committees. The reviews were commissioned in response to criticism of the bank's forecasting record and of its role in Britain's financial crisis.

Turner stressed in his speech the need for tough banking regulation.

The most drastic suggestion of abolishing all leverage at banks was probably taking it too far, Turner said in reference to recent suggestions made in an IMF working paper.

"But I do think we should take their ideas - rooted as they are in theoretical clarity about the origins of financial instability - as a spur to radicalism in our response to the financial crisis," he said.

"Free market finance left to itself will create huge instability - too much leverage in the real economy and within the financial system, too volatile a new credit supply, too much complexity and dangerous interconnectedness," he said.

"Increased financial intensity is not limitlessly beneficial," he added.

(Editing by Ruth Pitchford)