Business | Wed May 1, 2013 9:06pm BST

UK regulator defends tough bank capital rules

LONDON (Reuters) - Britain's top banking regulator defended his tough rules, saying strong capital buffers were a pre-condition for keeping the economy supplied with credit.

Andrew Bailey was speaking after the UK government urged the Bank of England's risk watchdog, on which Bailey sits, to ensure regulation does not impede recovery.

Banks complain it is difficult for them to keep lending to businesses and households when the BoE's Prudential Regulation Authority, headed by Bailey, is asking them to plug a 25 billion pound capital hole by year-end.

"We see evidence today of better capitalised banks tending to see more rapid growth in lending," Bailey told a dinner at the Chartered Institute of Bankers in Edinburgh.

Balance sheet strength is a necessary pre-condition of stronger lending to the economy as a whole, he said.

"At present the Bank of England is pursuing two important objectives: seeking to increase the resilience of the UK banking system and supporting the creation of credit in the UK economy."

Last week the central bank retooled its Funding for Lending Scheme designed to improve the supply of credit to the economy.

"We cannot say that this will conclusively deal with the question of whether the problem is a lack of loan supply or demand, but we can say that we have used our toolkit to create a big incentive for banks to lend to small firms," Bailey said.

It will also require a "very strong culture" for regulators to rein in banks to keep the financial system stable when the good times return.

"The record of the past indicates that the temptation to 'let the good times roll' is deeply embedded in the political economy of regulation," Bailey said.

(Reporting by Huw Jones; Editing by David Cowell)

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