* 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 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
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
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
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.
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.